The impact of capital flight on domestic investment: Empirical evidence from South Africa

Abstract

Capital flight has been a significant source of concern for many emerging countries. However, most of the debate on international capital flows focuses on examining the effects of foreign capital flows on economic growth. Thus, the implications of capital flight and its impact on domestic investment remain primarily unanalysed. This paper investigates the effect of capital flight on domestic investment in South Africa using an ARDL estimation between 1980 and 2018. The results show an inverse relationship between capital flight and domestic investment. In the long run, the impact of capital flight on domestic investment is more significant than the short-run impact, indicating that a persistent outflow of capital has a negative cumulative effect on domestic investment over time. The study further found foreign direct investment crowded out domestic investment in the long run.