Abstract
Migrant networks are an important catalyst for promoting FDI flows between countries. Migrants also send increasingly large remittances to their home countries. This paper considers how these two capital flows are related, specifically examining how remittance flows respond to the amount of FDI inflows to a country. Using a panel of 118 countries over 1980–2010, we estimate a random effects model and find a positive and significant effect of FDI flows on remittances, while controlling for other standard determinants of remittance flows. We account for the potential endogeneity of FDI to remittances by utilizing a two-stage Instrumental Variables approach. These findings suggest that FDI complements remittances, rather than crowding out emigrant investment to the home countries. We find the relationship is strongest for low income countries, highlighting the importance of remittances as a source of investment capital in these countries.
Appendix
Low income | Lower-middle income | Upper-middle income | High income | ||
---|---|---|---|---|---|
Armenia | Mauritania | Albania | Kazakhstan | Argentina | Australia |
Bangladesh | Moldova | Algeria | Latvia | Botswana | Austria |
Benin | Mongolia | Bolivia | Lithuania | Brazil | Belgium |
Burundi | Mozambique | Bulgaria | Morocco | Chile | Cyprus |
Cameroon | Nepal | Cambodia | Namibia | Costa Rica | Denmark |
Central African Republic | Nicaragua | China | Papua New Guinea | Croatia | Finland |
Congo | Niger | Colombia | Paraguay | Czech Republic | France |
Cote d’Ivoire | Pakistan | Dominican Republic | Peru | Estonia | Germany |
Gambia | Rwanda | Ecuador | Philippines | Gabon | Greece |
Ghana | Senegal | Egypt | Romania | Hungary | Ireland |
Haiti | Sierra Leone | El Salvador | Russia | Korea | Israel |
India | Sudan | Fiji | Sri Lanka | Libya | Italy |
Indonesia | Tajikistan | Guatemala | Swaziland | Malaysia | Japan |
Kenya | Tanzania | Guyana | Syria | Mauritius | Netherlands |
Kyrgyz Republic | Togo | Honduras | Thailand | Mexico | New Zealand |
Lao | Uganda | Iran | Tunisia | Panama | Norway |
Lesotho | Ukraine | Jordan | Poland | Portugal | |
Liberia | Vietnam | Saudi Arabia | Slovenia | ||
Mali | Yemen | Slovak Republic | Spain | ||
South Africa | Sweden | ||||
Trinidad and Tobago | Switzerland | ||||
Turkey | United Kingdom | ||||
Uruguay | United States | ||||
Venezuela |
Variable | Obs | Mean | Std. Dev. | Min | Max |
---|---|---|---|---|---|
Low income | |||||
KAOPEN | 761 | −0.47 | 1.27 | −1.86 | 2.46 |
Trade openness [(EX + IM)/GDP] | 762 | 65.80 | 36.38 | 6.32 | 209.87 |
Domestic credit to private sector (% of GDP) | 763 | 29.18 | 25.66 | −20.87 | 248.90 |
GDP per capita (PPP) | 763 | 1524 | 920 | 325 | 6734 |
Main host GDP per capita (PPP) | 763 | 9337 | 12001 | 510 | 43,636 |
Age dependency ratio | 763 | 84.34 | 16.31 | 36.36 | 113.71 |
Political violence index | 763 | 1.08 | 2.16 | 0 | 10 |
Share of labor with tertiary education | 763 | 2.26 | 3.67 | 0.07 | 24.55 |
Official development assistance (% of GDP) | 763 | 10.66 | 11.34 | 0.05 | 147.17 |
Lower-middle income | |||||
KAOPEN | 759 | −0.19 | 1.38 | −1.86 | 2.46 |
Trade openness [(EX + IM)/GDP] | 756 | 79.38 | 37.74 | 22.48 | 280.36 |
Domestic credit to private sector (% of GDP) | 759 | 51.46 | 35.58 | −12.62 | 269.58 |
GDP per capita (PPP) | 759 | 4853 | 2662 | 814 | 17,600 |
Main host GDP per capita (PPP) | 759 | 25,146 | 12,292 | 823 | 49,952 |
Age dependency ratio | 759 | 68.71 | 16.66 | 34.52 | 107.75 |
Political violence index | 759 | 0.98 | 1.86 | 0 | 9 |
Share of labor with tertiary education | 759 | 4.63 | 4.34 | 0 | 24.74 |
Official development assistance (% of GDP) | 729 | 3.26 | 4.08 | −0.07 | 35.32 |
Upper-middle income | |||||
KAOPEN | 491 | 0.28 | 1.48 | −1.86 | 2.46 |
Trade openness [(EX + IM)/GDP] | 491 | 84.57 | 46.10 | 12.35 | 220.41 |
Domestic credit to private sector (% of GDP) | 491 | 55.52 | 43.63 | −72.99 | 212.92 |
GDP per capita (PPP) | 491 | 11,198 | 4263 | 3611 | 26,774 |
Main host GDP per capita (PPP) | 491 | 27,354 | 12,294 | 501 | 52,170 |
Age dependency ratio | 491 | 59.46 | 13.52 | 37.61 | 96.22 |
Political violence index | 491 | 0.26 | 0.83 | 0 | 5 |
Share of labor with tertiary education | 491 | 5.64 | 4.44 | 0.16 | 30.04 |
Official development assistance (% of GDP) | 445 | 0.63 | 1.37 | −0.07 | 9.97 |
High income | |||||
KAOPEN | 594 | 1.63 | 1.22 | −1.86 | 2.46 |
Trade openness [(EX + IM)/GDP] | 594 | 68.86 | 32.48 | 15.92 | 183.62 |
Domestic credit to private sector (% of GDP) | 594 | 120.70 | 56.53 | 22.90 | 328.99 |
GDP per capita (PPP) | 594 | 26,182 | 6844 | 11,350 | 48,403 |
Main host GDP per capita (PPP) | 594 | 28,700 | 7187 | 7902 | 46,906 |
Age dependency ratio | 594 | 50.76 | 4.86 | 41.52 | 71.61 |
Political violence index | 594 | 0.24 | 0.92 | 0 | 7 |
Share of labor with tertiary education | 594 | 10.77 | 5.22 | 1.36 | 26.80 |
Variable | Definition | Source |
---|---|---|
FDI (% of GDP) | Net inflows of FDI (new investment minus disinvestment), equal to sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital, divided by GDP | World Bank, World Development Indicators (2012) |
Trade openness [(EX + IM)/GDP] | Exports of goods and services plus imports of goods and services, divided by GDP | |
Domestic credit to private sector (% of GDP) | Financial resources provided to private sector by financial corporations, including monetary authorities and deposit money banks. | |
GDP per capita (PPP) | Gross domestic product converted to international dollars using purchasing power parity rates, in constant 2011 international dollars. | |
Main host GDP per capita (PPP) | GDP of host country with largest immigrant stock from source country at beginning of decade. Measured in 2011 international dollars. | |
Age dependency ratio | Proportion of population younger than 15 and older than 64 per 100 working age population | |
Official development assistance (% of GDP) | Consists of disbursement of loans (net of repayments of principal) and grants made to promote economic development and welfare | |
Remittances (% of GDP) | Personal remittances are the sum of personal transfers and compensation of employees as defined by 6th edition of IMF’s Balance of Payments Manual | World Bank, Migration and Remittances Factbook (2011) |
Emigrant stock | Total size of source country-born population living outside of source country at beginning of decade | |
KAOPEN | Index variable based on restrictions of cross-border financial transactions reported in IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) | Chinn and Ito (2006) |
Political violence index | Index measuring magnitude of international warfare, civil warfare, civil violence, ethnic violence, and ethnic war | Marshall (2016) |
Share of labor with tertiary education | Percent of population over the age of 25 that has completed tertiary level of education. Measured in 5 year intervals | Barro and Lee (2013) |
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