2.1 Globalisation
Globalisation refers to the process of the intensification of economic, political, social and cultural relations across international boundaries. It is principally aimed at the transcendental homogenization of political and socio-economic theory across the globe. It is equally aimed been a global arena”. It aims at the “trade barriers breakdown increment and the World market. Globalization means the ability of approaching integration of a nation into the world economy. Globalization entails the links among enterprises, institution as well as citizens across national borders. Thus, as a historical process, globalization it is the result of innovation and technological progress by humans.
According to Mutascu and Fleischer (2011), globalization has been seen to generate both positive and negative effects. Some of these positive effects include increased national income through comparative advantage, access to global capital, spread of technology, opportunities for individuals and spread of human rights. Whereas the negative effects may include its ability to weaken the position of those lacking skill or capital, the problem of economic openness in weak states, exploitation of works in poorer countries, destabilizing global capital markets, loss of cultural integrity, an undermined national economic autonomy and so on.
2.2 Capital flows
Capital flows can be either capital inflows or capital outflows. A capital outflow has been regarded as a major factor contributing to the foreign debt problem and inhibiting development effects in the third world. The huge amounts of capital outflows experienced by the Less Developed Countries (LDC) and their effects on the national economy have attracted the attention of many economists in recent years. Causes of capital outflows, according to Ajayi (2005) include varying risk perception, exchange rate misalignment, financial sector constraints and repression, fiscal deficits, weak institutions, macroeconomic policy distortions, corruption and extraordinary access to government funds among others.
Lesser and Williamson (1987) defines capital outflows as illegal conveyance of capital aboard which stays unrecorded in the national accounts of developing countries.
Carlvo and Hermandez (1996); Uchenolu (1994); Pierre (1998); Stevens (2003) and Obadan (2004) have attributed capital outflows to macroeconomic mismanagement, policy distortions, exchange rate misalignment and budget deficit respectively. For example, as investors anticipate higher taxes, they divert their investment abroad. Also, where the local currency is overvalued, it leads to real exchange rate appreciation in order to correct the over valuation. When currency devaluation is expected, investors usually move out their domestic assets and invest in foreign countries in order to avoid the capital loss that will result from devaluation. In order to finance the budget, government usually prints more money, a practice which is inflationary. If inflation persists, individuals will choose to reduce their real holdings of domestic currency in order to protect themselves against the so-called inflation tax. In relation to this, when fiscal deficit is financed through bond sales, domestics resistant may expect that at some future date, their tax base liability may increase in order to pay for national debt. This as it were, induces domestic investors to move their assets to foreign countries to avoid potential tax liability.
Capital flows have myriads of adverse effect on the affected country. According to Deppler and Williamson (1987), capital outflow leads to a net loss investment and growth. Capital outflow perpetuates the debt crises not only through diversion of savings but also because retention of assets and earnings abroad erodes the domestic tax base and lead to more budget deficits that require contracting further debts to finance. Capital outflow can be reversed if the necessary economic policies are put in place. According to Obadan (2004), one way of doing this is to restore confidence in the economy which would require the government to do a number of things with particular focus on the following; strengthening the financial system and improve governance, pursue sound macroeconomic policies and appropriate structure reforms, tackling the weaknesses that are causing capital outflows. He further emphasized, that providing a stable financial and macroeconomic environment is crucial to reducing uncertainty and arresting capital outflows.
2.3 Theoretical literature
2.31 The Investment Diversion Theory
This theory postulates that due to the macroeconomic and political uncertainty in developing country and the simultaneous existence of better investment opportunities in advanced countries like high foreign interest rates, wide array of financial instruments, political and economic stability, favourable tax climate and secrecy of accounts, some unscrupulous corrupt leaders and bureaucrats usually siphon scarce resources from their countries to advanced countries. These funds are therefore, not available for investment at home leading to decline in aggregate investment, low economic growth, hence decline in employment, increase in dependency ratio and high death rate. These negative macroeconomic effects on these countries sometimes motivates the necessity to borrow from abroad to reactivate the domestic economy, which is sometimes further siphon thereby perpetrating external dependency and indebtedness.
2.4 Empirical literature
Ofori Atta (2017) centred his study on the effects of globalization on the manufacturing sector of Ghana having used FDI as a proxy for globalization. The study employed the simple ordinary least squares (OLS) regression and the empirical analysis was conducted using data between 1985 and 2013. It was found that the independent variable ‘MANGH’ was significant to explain the dependent variable FDI whose influence was negative. This indicated that, there was a negative correlation between FDI and manufacturing in Ghana. The negative effect which emanated from trade, financial sector and exchange rate liberalization, is materialized through stiffer competition, increased cost of production, and loss of confidence by indigenous investors. The study recommended among others that the government of Ghana must revisit policies relating to FDI and trade liberalization in order to salvage the manufacturing sector.
Amaefule (2020) examined the impact of the dynamical nature of Foreign Direct Investment (FDI) inflow and Official Development Assistance (ODA) inflow on growth and trade indicators in Ghana and Nigeria. Secondary data sourced from World Development Indicators for the period covering 1970–2017 were utilized. The Nonlinear ARDL Bound F-test showed a long-run relationship between global capital inflows and growth and trade. Specifically, positive FDI inflow generate a positive impact on RGDP in Ghana and negative impact on RGDP in Nigeria while a negative FDI inflow leads to a positive impact on RGDP in Ghana and negative impact on RGDP in Nigeria. Also, positive ODA inflow causes a positive impact on RGDP in Ghana and Nigeria and a negative ODA inflow has a negative impact on RGDP in Ghana and Nigeria. Furthermore, positive and negative ODA inflow has negative and positive impact on trade openness in Ghana and negative impacts in Nigeria.
Duodu and Baidoo (2020) examined the impact of capital inflows on economic growth in Ghana. Using annual time series data, spanning 1984–2018, the autoregressive distributed lag model is employed for the analysis. The results without interaction terms show that remittances have a positive impact on economic growth, whereas external debt and foreign direct investment impact economic growth negatively in the long run. Foreign aid exerts an insignificant impact in both the short and long run. However, the results reveal that external debt significantly impacts economic growth positively when interacted with quality of institutions variable in the long run. The results further reveal that remittances have a positive impact on economic growth in the long run when interacted with quality of institutions variable. It is, therefore, concluded that the quality of institutions in Ghana is crucial for economic growth. Important policy implications aimed at improving economic growth have been provided based on the findings.
Maduka, Madichie and Eze (2017) observes Globalization and Economic Growth: Evidence from Nigeria. Thus, the study uses the contemporary econometric techniques of co-integration and error correction mechanism within the framework of the Pesaran et al. (2001) ARDL model to examine the impact of globalization on economic growth in Nigeria. Using annualized secondary time series data from 1970 to 2015, the study reveals that trade openness; financial integration and foreign direct investment have significant positive impact on economic growth in Nigeria. Thus, adequate mechanism should be put in place to ensure that globalization brings about the desired pace of economic growth.
Igwemma, Egbulonu and Assumpta (2018) examined the impact of capital flight on the Nigerian economy from 1986–2016. Real Gross Domestic Product and Capital Flight were used as the endogenous variables while others were the explanatory variables. Data for these variables were sourced from the Central Bank of Nigeria (CBN) Statistical Bulletin, World Bank Development Index, Economic and Financial Crimes Commission Bulletins, Tertiary Education Trust Fund Publications and the Federal Ministry of Information Annual Briefings and Extracts (various editions). The variables were found to be integrated of mixed order hence we confirmed the long run relationship existing among the variables using the Bounds test. The simultaneous equation model shows a negative and significant relationship between capital flight and economic growth. Domestic Investment and Interest Rate Differential both have positive relationships with Real GDP while Political Instability, looted Funds, Expenses on Foreign Education and Medical Services were found to have positive and significant impact on Capital Flight. The implication of these findings is that Capital flight have negatively impacted on Economic growth of Nigeria with Foreign Education and Medical Expenses and Looted Funds being the major channels through which huge capital leave the country. It was recommended that our education and health infrastructures should be adequately funded and maintained.
Olunkwa (2018) focused on capital flow components and industrial performance in Nigeria for the period 1980 and 2016. Furthermore, VEC Model is used for the study, while granger causality test is employed to examine the causal link between capital flow components and industrial performance proxied with industry value added. The result affirm that long-run and short-run relationship exists between capital flow components and industrial performance, and no causality exist between workers’ remittance, official development assistance and industry valued, although unidirectional causality exist between foreign capital inflow and industry value added. In addition, the paper recommend that for there to be sustainable improvement in the industrial sector, government have to urgently address the issue of insecurity and policy inconsistency so as to allow free flow of capital, workers’ remittance and foreign investors confidence into the country.
Ikpesu (2019) aims to ascertain the growth effects of capital inflows using investment as a transmission channel between the periods 1981 to 2016 in Nigeria. The study employed the least square regression method to analyse the data. The outcome of the research indicates that capital inflows have a positive and significant effect on the growth of the Nigeria economy. This implies that foreign capital inflows have contributed to the economic growth of the country. Furthermore, the research output also showed that domestic investment has a positive and significant effect on Nigerian economic growth. From the findings of the study, it is concluded that capital inflow and domestic investment has positively contributed to the growth of Nigeria economy. The findings of this study posed significant policy direction. Firstly, the study emphasized the need for government and policy-makers to attract more inflow of foreign capital into the country but the detrimental effect of huge capital inflow into an economy should also be considered. Secondly, the government should determine the optimal capital inflow that would propel investment and growth in the country.
Balogun et. al., (2019) examines the impact of capital flows on economic growth in Nigeria using data covering the period 1981 to 2016 and sourced from the Central Bank of Nigeria. The method of error correction model framework and autoregressive distributed lag was adopted in estimating our specified model. Findings from our estimated model reveal that capital flows significantly affect economic growth in Nigeria. The study thus recommends that, sound, robust and vigorous economic policies be formulated with the sole purpose of attracting and drawing capital flows into the country that helps to bridge the needed capital for economic growth and development in Nigeria.