Doing Business and capital flight: role of financial development

Abstract

Purpose: The purpose of this paper is to investigate the effect of financial development on the Doing Business and capital flight contagion. And further, this study determines the threshold beyond which financial development reduces capital flight. Design/methodology/approach: A two-step system generalized methods of moment empirical model with linear interaction between Doing Business and financial development was estimated. This study used data on 26 countries over 12 years (2004–2015). Findings: The main results indicated that, although Doing Business had a significant positive effect on capital flight, the interactive term had a significant adverse effect on capital flight. This outcome suggests that to reduce capital flight, a well-reformed and efficient business environment should be embedded with an efficient, stable and well-developed financial sector. In addition, the authors found only South Africa has a robust financial framework beyond the threshold of 0.383, whereas Congo, Rep., Rwanda, Malawi, Sierra Leone and Congo, Dem. Rep. had the weakest financial system and sector in Sub-Saharan Africa. Research limitations/implications: This study recommends that policymakers should initiate policies that would enhance financial development. Originality/value: This study’s main contributions are that the authors estimated the threshold beyond which financial development helps the business environment reduce the rate of capital flight. Further, the authors have shown that financial development is a catalyst to propel the deterioration powers of the business environment against capital flight. Also, the authors have estimated the long-run effect of the variables of interest on capital flight.