Capital flows and domestic investment: new evidence from OPEC countries

Abstract

Purpose

In the past few decades, there have been phenomenal increases in capital flows to developing and emerging markets. However, a key question that has largely remained unanswered is whether the expected economic benefits have materialized. Existing studies have concentrated on the impact of capital flows on domestic investment in developing countries, emerging markets, transition economies, ECOWAS and sub-Saharan Africa, leaving an important economic bloc, OPEC. This paper aims to assess the impact of capital flows on domestic investment in OPEC countries – with a view to determining whether capital flows crowd in or crowd out domestic investment.

Design/methodology/approach

For the empirical analysis, the authors used the autoregressive distributed lag (ARDL) technique.

Findings

The empirical results provide evidence that capital flows crowd out domestic investment in all the OPEC countries considered, except for Angola and Kuwait. The authors further extended the analysis to disaggregated capital flows (FDI, portfolio investment). Evidence from the different capital flows components revealed that, for most countries, the different capital flows components also crowd out domestic investment.

Originality/value

To the best of the author’s knowledge, no study has empirically addressed the effect of capital flows on domestic investment in OPEC countries. This study, therefore, constitutes an interesting empirical contribution and a novel idea in the literature.

Citation

Ibhagui, O. and Olawole, K. (2019), "Capital flows and domestic investment: new evidence from OPEC countries", Journal of Financial Economic Policy, Vol. 11 No. 4, pp. 505-532. https://doi.org/10.1108/JFEP-06-2018-0090