Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

Abstract: This paper studies the impact of remittances on investment. Workers’ remittances to developing countries have grown to be an important source of financing, amounting to around $300 billion a year. The funds are used for both consumption and investment in the home countries of the migrants. The importance of financial and institutional framework in the receiving countries and how they interact with remittances is stressed. Data on remittance flow to 79 developing countries during 1995-2005 is used. Dynamic panel data approach is applied for this purpose. The results reveal that remittances, high quality institutional framework and well developed credit market increase investment. However, it is also found that the marginal importance of remittances as a financial source for investment decreases with improved institutional framework and a more developed credit market.

Keywords: Remittances; Investment; Institutions; Financial Development; Dynamic Panel Data

JEL-codes: C23; E22; F24; G21; I38; O16; O17

26 pages, February 11, 2010

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