Capital Flight Research Articles

Articles: The relationship between MNE tax haven use and FDI into developing economies characterized by capital flight

The use of tax havens by multinationals is a pervasive activity in international business. However, we know little about the complementary relationship betweentax haven use and foreign direct investment (FDI) in the developing world. Drawing on internalization theory, we develop a conceptual framework that explores this relationship and allows us to contribute to the literature on the determinants of tax haven use by developed-country multinationals. Using a large, firm-level data set, we test the model and find a strong positive association between tax haven use and FDI into countries characterized by low economic development and extreme levels of capital flight. This paper contributes to the literature by adding an important dimension to our understanding of the motives for which MNEs invest in tax havens and has important policy implications at both the domestic and the international level.

Identification of triggers of U.S. yield curve movements

We present new evidence for understanding the sources of daily movements in U.S. Treasury yields. We use a novel narrative approach combined with Bayesian inference to identify news-based triggers of yield movements between 2001 and 2019. We show that the U.S. macroeconomic news was the core trigger of U.S. Treasury yield volatility over most of the period under analysis. However, the importance of non-macroeconomic news associated with capital flight has increased significantly since 2011, and they became the dominant source of movements in the long end of the U.S. yield curve after 2016. This highlights the growing importance of the U.S. Treasuries as a safe haven asset and implies possible partial loosening of the relation between U.S. Treasury yields and the U.S. business cycle.

Must Land Reform Benefit the Victims of Colonialism?

ABSTRACT Elsewhere I have argued that African values such as communion and reconciliation require compensating those who have been wronged in ways likely to improve their lives. I have also contended that, when applied to land reform, this principle entails not transferring unjustly acquired land en masse and immediately to dispossessed populations since doing so would foreseeably lead to such things as capital flight and food shortages, which would harm them and the broader society. Oritsegbubemi Anthony Oyowe has recently argued against my claim that land reform should be enacted so as to benefit victims of colonialism while not greatly burdening innocent third parties, instead supporting the return of land to its rightful owners regardless of how the manner in which it were done would affect people’s quality of life. Here I expound Oyowe’s argumentation and respond to it in defense of my initial position, appealing to examples from southern Africa.

Impact of Capital Flight on Tax Revenue in Nigeria: A Co-integration Approach

This study presents an empirical analysis of the impact of capital flight on tax revenue in Nigeria. We made use of secondary data collected from the Central Bank of Nigeria Statistical Bulletin of various issues, Federal Inland Revenue Services and National Bureau of Statistics. The empirical measurement covers the sample period between 1980 and 2015. An Ordinary Least Square, Augmented Dickey-Fuller unit root test, Error Correction Mechanism and Co-integration test was adopted in the study. The results revealed that the Gross Domestic Product has a significant effect in the positive direction, while capital flight and inflation rate have a significant effect in the negative direction. The study recommended that the Federal Inland Revenue System, the department saddled with the responsibility of tax collection, should review the tax system and policies with the aim of plugging loopholes in the existing tax system thereby preventing organizations from evading and avoiding taxes.

Capital flight and diamond exports in the Central African Republic: The role of political governance crisis

AbstractThe purpose of this paper is to examine the relationship between capital flight, diamond exports and political governance crisis in the Central African Republic. To achieve this, use is made of multiple correspondence analysis to construct a political governance crisis index, and the Autoregressive Distributed Lag Model and Bound test for co‐integration are employed to establish short‐run and long‐run relationships. The short‐run results show political governance crisis and diamond exports have a significant and negative effect on capital flight. The interaction term between diamonds exports and political governance crisis is found to be positively related to capital flight in the short run. The long‐run equilibrium shows a significant and negative relationship between political governance crisis, diamond exports, and gross domestic product growth even though the interaction between political governance crisis and diamond exports show a positive and significant relationship. The total natural resource rent is found to be positively related to capital flight but not statistically significant. It is then recommended that a combination of stable political governance associated with reducing corruption in public affairs and promoting transparency in the management of the diamond sector be strengthened to effectively reduce the flight of capital.

A Regime Switching Skew-Normal Model of Contagion in Major African Stock Markets

This study was carried out to examine the contagion and structural break for some selected African stock markets namely: Nigeria, Ghana, South Africa (SA), Tunisia, and the US stock market. To achieve this, two periods were considered, that is the crisis period, 31st December, 2013 to 31st December, 2017 and the non-crisis period, 1st January, 2018 to 31st December, 2019. The choice of these periods was to reflect the structural break caused by economic recession in Nigeria during the crisis period. The expectation is that there is capital flight from Nigerian equities to safety in the selected emerging economies in Africa and in the US economy. Following the work of Chan et al (2018), the study used Regime Switching Skew-Normal (RSSN, henceforth) model which is capable of measuring contagion and structural breaks between markets and across crisis and non-crisis periods. The RSSN model was estimated using Bayesian method. The study finds the existence of moderate contagion between Nigeria and SA and the absence of contagion with the rest of the economies, suggesting there is capital flight from equities in Nigeria to SA for safety during the 2016 economic recession. Also, the study confirms the presence of structural break between crisis and non-crisis periods as the probability of average return declines during crisis period. The absence of contagion among African stock markets suggests there is no significant economic cooperation and cross-border portfolio investment flow among the countries. This development further underpins the imperative of the full implementation of African Continental Free Trade Area (AfCFTA), which is to encourage economic activities and investment flow on the continent.

Recapitalisation and the Financial Performance of Firms: Empirical Evidence from the Insurance Industry in Nigeria

Financial Performance sits at the core of a firm’s ability to meet the expectations of its stakeholders and create sustainable value. The history of insurance in Nigeria traces back to the pre-colonial era with the creation of the Royal Exchange Assurance Agency in 1918. The industry, however, is arguably one of the least performing sectors within the Nigerian economy and the financial service sector in particular. Recapitalization reforms have been acknowledged as one of the actions that improve the financial performance of firms, this study, therefore, gauged the impact of recapitalization on the financial performance of the insurance industry in Nigeria. The study adopted the Expected Bankruptcy Cost Hypothesis, Signalling Theory and Risk-Return Hypothesis to underpin the impact of Recapitalisation reforms on the performance of firms. Using Purposive Sampling technique, the study selected the top 12 (contributing 74% of total insurance industry revenue in 2018) insurance companies in Nigeria from 2009 to 2018 and used annual reports obtained from the company’s corporate website to select variables of interest. Using Shareholders Funds (SHF) as a proxy for recapitalization and Gross Written Premium (GWP), Profit before Tax (PBT), Total Assets (TA) and Capital Employed (CE) as proxies for financial performance, Least Square regression result show a positive and substantial relationship between recapitalization and the financial performances of firms. The study, therefore, recommends that the upcoming recapitalization reforms in the insurance sector be embraced by all stakeholders as evidence suggest that the industry would be in a better financial state and well-positioned to take on large/complex in-country risk thereby forestalling capital flight. Keywords: Recapitalisation, Financial, Performance, Insurance, premium DOI: 10.7176/EJBM/12-23-07 Publication date: August 31 st 2020

Business Environment and Entrepreneurial Motivations of Urban Students.

College students’ perceptions of entrepreneurial environments exert significant influence on their entrepreneurial motivations. With China’s increased focus on entrepreneurship and innovation, an increasing number of college students have embarked on a journey of self-employment and entrepreneurship. Due to disparities in the urban entrepreneurial environments, however, their entrepreneurial ventures in urban spaces are characterized by extreme phenomena such as entrepreneurial clusters and human capital flight, thus constraining economic development. This study sampled 244 college students from Wenzhou, China, and analyzed their opinions on the relationship between their perceptions of the entrepreneurial environment and associated motivations. We concluded that college students’ entrepreneurial motivations are significantly and positively affected by their perception of socio-economic conditions, education and training, and availability of financial and non-financial support, and insignificantly affected by their perceptions of the favorability of government policies as related to entrepreneurial development.

The Impact of Cryptocurrency Regulation on Trading Markets

The meteoric growth of global cryptocurrency markets presents novel challenges to regulators. Some policymakers and scholars warn that regulation will cause trading activity to cross borders into less-regulated jurisdictions—or even smother a promising new financial asset class. Others believe regulatory actions will stimulate activity by providing clarity to market participants. Standing behind this disagreement is a debate about the desirability of either outcome. Some believe that governments should promote development of the cryptocurrency sector within their countries, while others view cryptocurrencies as conduits of illegality and fraud that should be restricted through strict regulation or even outright bans. Yet these debates have, to date, been conducted almost entirely without data concerning the effects of regulation on market activity. As a corrective, we assemble original data on cryptocurrency regulations worldwide and use them to empirically examine movement in trading activity at a number of exchanges following key regulatory announcements. Our findings are surprising. A wide variety of models yields almost entirely null results. From the creation of bespoke licensing regimes to targeted anti-money-laundering and anti-fraud enforcement actions, as well as many other categories of government activities, we find no systemic evidence that regulatory measures cause traders to flee, or enter into, the affected jurisdictions. These findings at last provide an empirical basis for regulatory decisions concerning cryptocurrency trading. Among other things, they call into question that capital flight or chilling effects should be a first-order concern.

Angola's quadruple bonanza: Where did all the money go?

Angola enjoyed a remarkable oil bonanza from 2002 to 2014, as the end of a long-running civil war coincided with a rise in oil production, high world oil prices, and large reconstruction assistance from China. This article takes stock of progress since then, asking whether and how this bonanza benefited Angola's people, what might have happened to all the money, and whether it resulted in changes to Angola's political structure. Many of the same rent-seeking activities as before were evident, but were complemented by a multitude of others. This has lessons for policy-makers studying capital flight and illicit financial flows.

Dividend Behaviour of Quoted Companies of the Douala Stock Exchange Market, Cameroon

For over sixty years now, finance researchers have concentrated on conducting studies on dividend behaviour as well as its determinants in different countries in the world.Some have exploited the effects of dividend payout on the performance of quoted companies with particular interest on current and previous levels of dividends as it is also the case with the level of profits, most of which give divergent conclusions. It is based on the above that this study was designed to examine the determinants of dividend behaviour ofquoted companies in the Douala Stock Exchange market using the Generalized Method of Moments (GMM) regressiontechniques based on secondary quarterly data from the Douala Stock ExchangeReports. The findings reveals thatearnings per share, the previous level of dividend and capital structure determine the current dividend behaviour in the Douala stock exchange market.While the previous level of dividend serves as a central bench mark when deciding on the dividend policy, increases in earnings per share and/or decrease in debt to equity ratio have potentials of significantly increasing dividend per share. Based on this finding, it is strongly recommended that policy measure by the government or corporate management aimed at providing and controlling a consistent pattern of dividend payment should take the previous level of dividends into consideration and should also pay special attention to earnings per share and capital structure of the listed companies.Therefore the capital structure which must be tilted towards indigenous equity should be put in place to avoid excessive capital flight.

The Effectiveness of Capital Controls

We investigate the effectiveness of capital controls using capital control indicators specific to several asset categories. The effectiveness of these policy instruments is analyzed along different angles. Specifically, we assess whether capital controls are effective in reducing the volume of capital flows, in reducing the probability of capital surges and flights, in strengthening financial stability, and in affecting the exchange rate. Our results point out three main conclusions. Capital controls are generally effective; the effectiveness of capital controls is differentiated for advanced and emerging economies; we find the largest effects on capital flows. We also show that capital controls are associated with a smaller probability of capital surges and flights, and, in emerging economies, with an undervalued exchange rate. We find some evidence that controls are associated with an improved financial stability, by reducing credit growth and FX currency loans: however, this evidence is not fully robust.

Governance and the capital flight trap in Africa

The study examines the use of governance tools to fight capital flight by reducing the capital flight trap. Two overarching policy syndromes are addressed in the study. It first assesses whether governance is an effective deterrent to the capital flight trap in Africa, before examining what thresholds of government quality are required to fight the capital flight trap in the continent. The following findings are established. Evidence of a capital flight trap is apparent because past values of capital flight have a positive effect on future values of capital flight. The net effects from interactions of the capital flight trap with political stability, regulation quality, economic governance and corruption-control on capital flight are positive. The critical masses at which ‘voice and accountability’ and regulation quality can complement the capital flight trap to reduce capital flight are respectively, 0.120 and 0.680, which correspond to the best performing countries. Policy implications are discussed.

The External Sector of the Russian Economy: Low Investment Yields and Capital Flight

ABSTRACT According to the Bank of Russia (BR), Russia has been a large net creditor to the rest of the world for the last two decades. In this period, however, the rest of the world’s net indebtedness to Russia has seen almost no increase. This article provides an explanation for this paradox: The net lending in Russia’s official balance of payments (BP) was to a large degree ephemeral, and several provisions in the methodology of these balances are debatable. The article also studies questions connected to the extremely low yields of Russia’s external investments, and it pays special attention to the divergence between the Bank of Russia’s and Eurostat’s statistics for direct investments between Russia and the European Union (EU). Based on the latest statistics constructed on the directional principle, it is shown that as compared to Eurostat, the Bank of Russia greatly inflates the volume of Russian direct investment into the EU and understates the scale of illegal capital flight from Russia. Finally, the article comes to the conclusion that some of the funds that the BR includes in Russia’s foreign direct investment (FDI) into the EU are considered by Eurostat to be capital irreversibly withdrawn from Russia. It also assesses the amount of Russian investment that makes round trips from “Russia EU special-purpose entities Russia.”

Investigating the role of disaggregated economic freedom measures and FDI on human development in Africa

PurposeThe purpose of the study is to investigate the role of disaggregated economic freedom measures in the foreign direct investment (FDI) and human development nexus.Design/methodology/approachThe study uses a panel data of 32 selected African countries from 1996 to 2017. A dynamic ordinary least squares (DOLS) with fixed effects and instrumental variable (IV) econometric techniques was used to address issues of endogeneity and serial correlation commonly associated with panel time series data.FindingsThe Results indicate that FDI without accounting for absorptive factors has a positive but insignificant effect on human development for the selected African countries. However, FDI has a positive and significant effect on human development when interacted with measures of economic freedom such as investment freedom, business freedom and financial freedom. In contrast, yet plausible, FDI has a negative influence when interacted with property rights, trade freedom, government integrity and tax burden.Practical implicationsThe study posits that to attract FDI into Africa with the purpose of improving human development, relevant absorptive capacities such as business, investment and financial freedom environment are critical. However, excessive capital flight and government interference through taxation and abuse of property rights should be controlled if the continent seeks to promote human development through FDI.Originality/valueThe novelty and originality of the study, are evident in the use of disaggregated measures of economic freedom as comprehensive absorptive capacities to examine how they complement FDI to impact on human development in Africa.

Inner Workings of the Chinese Economy and the US–China Trade War

China has been touted as a unique success story in development economics. The world financial crisis of 2007–2010 impacted China severely. Its GDP growth slowed, corporate debts piled up, equity markets became volatile, the renminbi weakened, and its forex reserves shrank in the face of capital flight. This paper analyzes the policymakers’ approaches in coping with the recent external shocks to the economy noted for having rigid economic structures (such as the trilemma problem and privatization issues). It discusses the tough balancing act facing the policymakers and the various reform options, including capital flow liberalization and structural reform. Finally, the paper discusses the US–China trade war.

Public policy, footloose capital, and union influence

AbstractThis document sets up a unionized general oligopolistic equilibrium model of countries, where capital is footloose and governments maximize utilitarian welfare. When capital owners have weak influence on public policy, there is unemployment and the governments compete for jobs, causing a distortion with suboptimal wages. Then globalization—as characterized by a decrease in impediments to international investment—increases the wage elasticity of capital flight, decreasing wages and increasing employment. This benefits the capital owners and the unemployed workers getting a job, but harms the other workers. International coordination of public policy alleviates these consequences of globalization.

COVID-19: How does it impact to the Indonesian economy?

The Coronavirus began to enter Indonesia in officially in early March 2020. The massive spread of COVID-19 caused a decline in economic activity, and the pandemic has been infected in various sectors such as household consumption, investment, and financial institutions in Indonesia. There is a threat of loss of community income because they cannot work to fulfill their daily needs, especially for poor and vulnerable households and the informal sector. The decline also occurred at MSMEs. This business actor cannot conduct his business activities so that his ability to fulfill credit obligations is impaired. The corporate sector has also been disrupted, especially in manufacturing, trade, and transportation. The disruption will reduce business performance so that it causes the termination of employment and even bankruptcy. Financial institutions also have the potential to experience liquidity problems, causing depreciation of Indonesian currency, volatility in financial markets, and capital flight.

The Moving Image as a Panacea for Concise Analysis and Means of Ensuring Good Governance and Ameliorating Youth Restiveness in the Niger Delta Region of Nigeria

The world is plagued with plethora of social issues generated from the complexity of modern existence. The control of sources of raw materials, exploitation, production, and trade has polarised our world. This paper looked at the Niger Delta situation from an audio-visual angle as reflected in the film ‘Krakraye’ by Gentle Jack. The Niger Delta region and her people have been neglected in terms of developmental needs in the Nigerian state, hence, the youths resort to self-identification and resource control which is the problem being stated. The aim of this paper is to present this issue bare in an audio-visual manner. The objectives are to concisely chronicle the real situation from the emergence of the military in the Nigerian scene to the present. Theoretical framework was the analytical approach to cultural studies, while the research methodology would entail the qualitative approach enmeshed with visual impressions, still photographs from the film ‘Krakraye’, and from other graphic and audio-visual sources. Findings of this study show that it is deliberate to underdevelop the Niger Delta region, keep the people poor so they will be loyal and could easily be overcome by the majority tribes, Hausa, Yoruba and Igbo who have never spoken against injustice meted to the Niger Delta communities. Contributions to knowledge is that visual presentation has shown the true plight of the Niger Delta people in visual images. Recommendations are that a naturally endowed, rich industrial environment should not be neglected for peace and development to thrive; stealing of the people’s commonwealth brings about capital flight as those in government are afraid to show their wealth in Nigeria rather, they launder and invest these monies abroad. This paper critically assessed the reach of film in exposing social anomaly as the case of the Niger Delta people, allegorically.
 Key Words: Film, Niger Delta, youth, democracy, development

Is neoliberalism still spreading? The impact of international cooperation on capital taxation

The downward trend in capital taxes since the 1980s has recently reversed for personal capital income. At the same time, it continued for corporate profits. Why have these tax rates diverged after a long period of parallel decline? We argue that the answer lies in different levels of change in the fights against tax evasion and tax avoidance. The fight against evasion by households progressed significantly since 2009, culminating in the multilateral adoption of automatic exchange of information (AEI). In contrast, international efforts against base erosion and profit shifting (BEPS) failed to curb tax avoidance by corporations. We theorize that international cooperation is an intervening variable, countering the negative impact of tax competition on capital taxation by reducing the risk of capital flight. Under such conditions, domestic political pressures in favor of higher capital taxes can unfold. We confirm our argument in a difference-in-difference analysis and through additional tests with data for up to 35 OECD countries from 2000–2017. Our central estimate suggests that the average tax rate on dividends in 2017 is 4.5 percentage points higher than it would have been absent international tax cooperation.