Heterogeneous Influence of Capital Flight and Economic Policy Uncertainty on Domestic Investment in Nigeria: New Evidence from Quantile Nonlinear ARDL

Abstract

This study explores the heterogeneous influence of capital flight and economic policy uncertainty (EPU) on domestic investment in Nigeria. The study utilizes the novel quantile-based nonlinear autoregressive distributed lag (QNARDL) estimation procedure to estimate both the sign-based and the size-based asymmetric influence of capital flight and EPU on domestic investment. The investigation’s outcomes are as follows: First, capital flight influences domestic investment negatively, predominantly in the upper quantiles. Second, it demonstrates that country-specific EPU and its global-based variant significantly negatively affect a country’s investment. Third, the study finds that domestic and world policy uncertainty aggravates the suppressing effect of capital flight on domestic investment. Fourth, a robust unidirectional causality from EPU (indigenous and world) to capital flight implies that policy uncertainty enervates the business climate and creates fear of losses among investors, affecting investment negatively. Fifth, the study indicates an increasing rate of devastating influence of EPU on domestic investment, with more pernicious effects at the upper quantile. The implication is that the devastating effect of EPU (whether country-based or world-based) on domestic investment is highly sensitive to its size. The policy recommendations from the main discoveries have been suggested.