Skip to content
Licensed Unlicensed Requires Authentication Published by De Gruyter May 18, 2018

Follow the Money: Remittance Responses to FDI Inflows

Michael Coon and Rebecca Neumann


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.

JEL Classification: F21; F23; F24; F35; F63


Table 9:

List of countries by income classification.

Low incomeLower-middle incomeUpper-middle incomeHigh income
CameroonNepalCambodiaNamibiaCosta RicaDenmark
Central African RepublicNicaraguaChinaPapua New GuineaCroatiaFinland
CongoNigerColombiaParaguayCzech RepublicFrance
Cote d’IvoirePakistanDominican RepublicPeruEstoniaGermany
HaitiSierra LeoneEl SalvadorRussiaKoreaIsrael
IndiaSudanFijiSri LankaLibyaItaly
Kyrgyz RepublicTogoHondurasThailandMexicoNew Zealand
LiberiaVietnamSaudi ArabiaSlovenia
MaliYemenSlovak RepublicSpain
South AfricaSweden
Trinidad and TobagoSwitzerland
TurkeyUnited Kingdom
UruguayUnited States

Table 10:

Additional summary statistics 1980–2010 (averages over countries and years).

VariableObsMeanStd. Dev.MinMax
Low income
 Trade openness [(EX + IM)/GDP]76265.8036.386.32209.87
 Domestic credit to private sector (% of GDP)76329.1825.66−20.87248.90
 GDP per capita (PPP)76315249203256734
 Main host GDP per capita (PPP)76393371200151043,636
 Age dependency ratio76384.3416.3136.36113.71
 Political violence index7631.082.16010
 Share of labor with tertiary education7632.263.670.0724.55
 Official development assistance (% of GDP)76310.6611.340.05147.17
Lower-middle income
 Trade openness [(EX + IM)/GDP]75679.3837.7422.48280.36
 Domestic credit to private sector (% of GDP)75951.4635.58−12.62269.58
 GDP per capita (PPP)7594853266281417,600
 Main host GDP per capita (PPP)75925,14612,29282349,952
 Age dependency ratio75968.7116.6634.52107.75
 Political violence index7590.981.8609
 Share of labor with tertiary education7594.634.34024.74
 Official development assistance (% of GDP)7293.264.08−0.0735.32
Upper-middle income
 Trade openness [(EX + IM)/GDP]49184.5746.1012.35220.41
 Domestic credit to private sector (% of GDP)49155.5243.63−72.99212.92
 GDP per capita (PPP)49111,1984263361126,774
 Main host GDP per capita (PPP)49127,35412,29450152,170
 Age dependency ratio49159.4613.5237.6196.22
 Political violence index4910.260.8305
 Share of labor with tertiary education4915.644.440.1630.04
 Official development assistance (% of GDP)4450.631.37−0.079.97
High income
 Trade openness [(EX + IM)/GDP]59468.8632.4815.92183.62
 Domestic credit to private sector (% of GDP)594120.7056.5322.90328.99
 GDP per capita (PPP)59426,182684411,35048,403
 Main host GDP per capita (PPP)59428,7007187790246,906
 Age dependency ratio59450.764.8641.5271.61
 Political violence index5940.240.9207
 Share of labor with tertiary education59410.775.221.3626.80

Table 11:

Variable descriptions and data sources.

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 GDPWorld 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 ratioProportion 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 ManualWorld Bank, Migration and Remittances Factbook (2011)
Emigrant stockTotal size of source country-born population living outside of source country at beginning of decade
KAOPENIndex 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 indexIndex measuring magnitude of international warfare, civil warfare, civil violence, ethnic violence, and ethnic warMarshall (2016)
Share of labor with tertiary educationPercent of population over the age of 25 that has completed tertiary level of education. Measured in 5 year intervalsBarro and Lee (2013)


Adams, R. H. 1998. “Remittances, Investment, and Rural Asset Accumulation in Pakistan.” Economic Development and Cultural Change 47 (1): 155–173.10.1086/452390Search in Google Scholar

Adams, R. H. 2009. “The Determinants of International Remittances in Developing Countries.” World Development 37 (1): 93–103.10.1016/j.worlddev.2007.11.007Search in Google Scholar

Adenutsi, D. E. 2014. “Macroeconomic Determinants of Workers’ Remittances and Compensation of Employees in Sub-Saharan Africa.” The Journal of Developing Areas 48 (1): 337–360.10.1353/jda.2014.0015Search in Google Scholar

Alesina, A., and D. Dollar. 2000. “Who Gives Foreign Aid to Whom and Why?” Journal of Economic Growth 5 (1): 33–63.10.1023/A:1009874203400Search in Google Scholar

Alfaro, L., A. Chanda, S. Kalemli-Ozcan, and S. Sayek. 2004. “FDI and Economic Growth: the Role of Local Financial Markets.” Journal of International Economics 64 (1):89–112.10.1016/S0022-1996(03)00081-3Search in Google Scholar

Alleyne, D., C. Kirton, G. McLeod, and M. Figueroa. 2008. “Short-Run Macroeconomic Determinants of Remittances to Jamaica: A Time Varying Parameter Approach.” Applied Economics Letters 15: 629–634.10.1080/13504850600721965Search in Google Scholar

Aydas, O. T., K. Metin-Ozcan, and B. Neyapti. 2005. “Determinants of Workers’ Remittances: The Case of Turkey.” Emerging Markets and Finance 41 (3): 53–69.10.1080/1540496X.2005.11052609Search in Google Scholar

Barro, R., and J.-W. Lee. 2013. “A New Data Set of Educational Attainment in the World, 1950–2010.” Journal of Development Economics 104: 184–198.10.1016/j.jdeveco.2012.10.001Search in Google Scholar

Basnet, H. C., and K. P. Upadhyaya. 2014. “Do Remittances Attract Foreign direct Investment? An Empirical Investigation.” Global Economy Journal 14 (1): 1–9.10.1515/gej-2013-0052Search in Google Scholar

Bellemare, M., T. Masaki, and T. Pepinsky. 2017. “Lagged Explanatory Variables and the Estimation of Causal Effects.” The Journal of Politics 79 (3): 949–963.10.1086/690946Search in Google Scholar

Borensztein, E., J. De Gregorio, and J-W. Lee. 1998. “How Does Foreign Direct Investment Affect Economic Growth?” Journal of International Economics 45 (1): 115–135.10.1016/S0022-1996(97)00033-0Search in Google Scholar

Buch, C. M., and A. Kuckulenz. 2010. “Worker Remittances and Capital Flows to Developing Countries.” International Migration 48 (5): 89–117.10.1111/j.1468-2435.2009.00543.xSearch in Google Scholar

Chami, R., C. Fullenkamp, and S. Jahjah. 2005. “Are Immigrant Remittance Flows a Source of Capital for Development?” IMF Staff Papers 52 (1): 55–81.Search in Google Scholar

Chinn, M. D., and H. Ito. 2006. “What Matters for financial Development? Capital Controls, Institutions, and Interactions.” Journal of Development Economics 81 (1): 163–192.10.1016/j.jdeveco.2005.05.010Search in Google Scholar

Choi, I. 2001. “Unit Root Tests for Panel Data.” Journal of International Money and Finance 20 (2): 249–272.10.1016/S0261-5606(00)00048-6Search in Google Scholar

Clemens, M., and T. Ogden. 2014. Migration as a Strategy for Household Finance: A Research Agenda on Remittances, Payments, and Development. Washington DC: Center for Global Development.10.2139/ssrn.2457148Search in Google Scholar

Coon, M. 2014. “Financial Development and the End-Use of Migrants’ Remittances.” IZA Journal of Labor & Development 3: 1–25.10.1186/2193-9020-3-7Search in Google Scholar

Collier, P. 2013. Exodus: How Migration is Changing Our World. New York: Oxford University Press.Search in Google Scholar

de Haas, H. 2010. “Migration and Development: A Theoretical Perspective.” International Migration Review 44 (1): 227–264.10.1111/j.1747-7379.2009.00804.xSearch in Google Scholar

De Simone, G., and M. Manchin. 2012. “Outward Migration and Inward FDI: Factor Mobility Between Eastern and Western Europe.” Review of International Economics 20 (3): 600–615.10.1111/j.1467-9396.2012.01041.xSearch in Google Scholar

El-Sakka, M., and R. McNabb. 1999. “The Macroeconomic Determinants of Emigrant Remittances.” World Development 27 (8): 1493–1502.10.1016/S0305-750X(99)00067-4Search in Google Scholar

Ezeoha, A. E. 2013. “Financial Determinants of International Remittance Flows to the Sub-Saharan African Region.” International Migration 51 (S1): 85–97.10.1111/imig.12061Search in Google Scholar

Freund, C., and N. Spatafora. 2008. “Remittances, Transaction Costs, and Informality.” Journal of Development Economics 86: 356–366.10.1016/j.jdeveco.2007.09.002Search in Google Scholar

Garcia-Fuentes, P. A., P. L. Kennedy, and G. F. Ferreira. 2016. “U.S. Foreign Direct Investment in Latin America and the Caribbean: A Case of Remittances and Market Size.” Applied Economics 48 (51): 5008–5021.10.1080/00036846.2016.1170931Search in Google Scholar

Giuliano, P., and M. Ruiz-Arranz. 2009. “Remittances, Financial Development, and Growth.” Journal of Development Economics 90: 144–152.10.1016/j.jdeveco.2008.10.005Search in Google Scholar

Granger, C. W. 1969. “Investigating Causal Relations by Econometric Models and Cross-spectral Methods.” Econometrica 37 (3): 424–438.10.2307/1912791Search in Google Scholar

Hagen-Zanker, J., and M. Siegel. 2007. The Determinants of Remittances: A Review of the Literature. Maastricht: Maastricht Graduate School of Governance.10.2139/ssrn.1095719Search in Google Scholar

Higgins, M., A. Hysenbegasi, and S. Pozo. 2004. “Exchange-Rate Uncertainty and Workers’ Remittances.” Applied Financial Economics 14: 403–411.10.1080/09603100410001673630Search in Google Scholar

Holtz-Eakin, D., W. Newey, and H. S. Rosen. 1988. “Estimating Vector Autoregressions with Panel Data.” Econometrica 56 (6): 1371–1395.10.2307/1913103Search in Google Scholar

Hossain, D. 2014. “Differential Impacts of Foreign Capital and Remittance Inflows on Domestic Savings in Developing Countries: A Dynamic Heterogeneous Panel Analysis.” Economic Record 90 (Special Issue): 102–126.10.1111/1475-4932.12114Search in Google Scholar

Javorcik, B. S., Ç. Özden, M. Spatareanu, and C. Neagu. 2011. “Migrant Networks and Foreign Direct Investment.” Journal of Development Economics 94 (2): 231–241.10.1016/j.jdeveco.2010.01.012Search in Google Scholar

Jordaan, Jacob A. 2011. “FDI, Local Sourcing, and Supportive Linkages with Domestic Suppliers: The Case of Monterrey, Mexico.” World Development 39 (4): 620–632.10.1016/j.worlddev.2010.08.012Search in Google Scholar

Kpodar, K., and M. Le Goff. 2011. “Do Remittances Reduce Aid Dependency?” IMF Working Paper WP/11/246.10.2139/ssrn.1956393Search in Google Scholar

Kugler, M., and O. L. Rapaport. 2013. “Migration and Cross-Border Capital Flows.” IZA Discussion Paper, No. 7548.Search in Google Scholar

Leblang, D. 2010. “Familiarity Breeds Investment: Diaspora Networks and International Investment.” American Political Science Review 104 (3): 584–600.10.1017/S0003055410000201Search in Google Scholar

Lucas, R. E., and O. Stark. 1985. “Motivations to Remit: Evidence from Botswana.” Journal of Political Economy 93 (5): 901–918.10.1086/261341Search in Google Scholar

Markusen, J. R., and A. J. Venables. 1999. “Foreign Direct Investment as a Catalyst for Industrial Development.” European Economic Review 43: 335–356.10.1016/S0014-2921(98)00048-8Search in Google Scholar

Marshall, M. G. 2016. “Major Episodes of Political Violence and Conflict Regions, 1946–2015.” Center for Systemic Peace. Retrieved from in Google Scholar

Mundaca, G. B. 2009. “Remittances, Financial Market Development, and Economic Growth: The Case of Latin America and the Caribbean.” Review of Development Economics 13 (2): 288–303.10.1111/j.1467-9361.2008.00487.xSearch in Google Scholar

Nwaogu, U. G., and M. J. Ryan. 2015. “FDI, Foreign Aid, Remittance and Economic Growth in Developing Countries.” Review of Development Economics 19 (1): 100–115.10.1111/rode.12130Search in Google Scholar

Ramirez, M. D., and H. Sharma. 2009. “Remittances and Growth in Latin America: A Panel Unit Root and Panel Cointegration Analysis.” Economic Studies of International Development 9 (1): 5–36.Search in Google Scholar

Rapaport, H., and F. Docquier. 2006. “The Economics of Migrants’ Remittances.” In Vol. 2 of Handbook of the Economics of Giving, Altruism and Reciprocity, edited by S.-C. Kolm and J. M. Ythier, 1135–1198. Amsterdam: North-Holland.10.1016/S1574-0714(06)02017-3Search in Google Scholar

Ratha, D. 2003. “Workers’ Remittances: An Important and Stable Source of External Development Finance.” In Global Development Finance 2003 Vol 1 (Analysis and Statistical Appendix), edited by W. Bank, 157–175. Washington, DC: The World Bank.Search in Google Scholar

Reed, W. 2015. “On the Practice of Lagging Variables to Avoid Simultaneity.” Oxford Bulletin of Economics and Statistics 77 (6): 897–905.10.1111/obes.12088Search in Google Scholar

Rodriguez-Montemayor, E. 2012. Diaspora Direct Investment: Policy Options for Development. Washington, DC: Inter-American Development Bank.Search in Google Scholar

Selaya, P., and E. R. Sunesen. 2012. “Does Foreign Aid Increase Foreign Direct Investment?” World Development 40 (11): 2155–2176.10.1016/j.worlddev.2012.06.001Search in Google Scholar

Stock, J. H., and M. Yogo. 2005. Testing for Weak Instruments in Linear IV Regressions. Identification and Inference for Econometric Models: Essays in Honor of Thomas Rothenberg.10.3386/t0284Search in Google Scholar

Terrazas, A. 2010. Diaspora Investment in Developing and Emerging Country Capital Markets: Patterns and Prospects. Washington, DC: Migration Policy Institute.Search in Google Scholar

Vargas-Silva, C., and P. Huang. 2006. “Macroeconomic Determinants of Workers’ Remittances: Host Versus Home Country’s Economic Conditions.” Journal of International Trade & Economic Development 15 (1): 81–99.10.1080/09638190500525779Search in Google Scholar

Wang, M., and M. C. Wong. 2011. “Inward FDI, Remittances and Out-Migration.” Applied Economics Letters 18 (15): 1405–1409.10.1080/13504851.2010.539530Search in Google Scholar

Woodruff, C., and R. Zenteno. 2007. “Migration Networks and Microenterprises in Mexico.” Journal of Development Economics 82 (2): 509–528.10.1016/j.jdeveco.2006.03.006Search in Google Scholar

Wooldridge, J. 2002. Econometric Analysis of Cross Section and Panel Data. Cambridge, MA: MIT Press.Search in Google Scholar

World Bank. 2011. Migration and Remittances Factbook. Washington, DC: The World Bank.Search in Google Scholar

World Bank. 2012. World Development Indicators. Washington, DC: The World Bank.Search in Google Scholar

World Bank. 2017. Remittances Prices Worldwide. Washington DC: World Bank.Search in Google Scholar

Wouterse, F., and J. E. Taylor. 2008. “Migration and Income Diversification: Evidence from Burkina Faso.” World Development 36 (4): 6625–6640.Search in Google Scholar

Yang, D. 2008. “International Migration, Remittances and Household Investment: Evidence from Philippine Migrants’ Exchange Rate Shocks.” Economic Journal 118 (528): 591–630.10.1111/j.1468-0297.2008.02134.xSearch in Google Scholar

Yogo, T., and D. Mallaye. 2011. “Remittances, Foreign Direct Investment and Aid in Fragile States: Are They Complements or Substitutes?” SSRN Electronic Journal. DOI: 10.2139/ssrn.1795253.Search in Google Scholar

Published Online: 2018-5-18

©2017 Walter de Gruyter GmbH, Berlin/Boston

Scroll Up Arrow