The impact of remittance inflows on private investment in developing economies: The role of instituitional quality

Abstract

In addition to Official Development Aid (ODA) and Foreign Direct Investment (FDI), remittances play a crucial role in the economic activities of developing economies. At the same time, private investment is an essential driver of economic growth. Does institutional quality influence the relationship between remittances and private investment in developing economies? This paper seeks this research question by employing the two-step system and difference GMM estimators to examine the impacts of remittances, institutional quality, interaction between remittances and institutional quality, and some control variables (labor force, economic growth, and inflation) on private investment for a dataset of 87 developing countries from 2002 to 2022. Surprisingly, the results reveal counter-intuitive findings. The results are counter-intuitive in that remittance promotes and institutional quality decreases private investment, but their interaction increases it. Moreover, economic growth, labor force, and inflation are positive determinants of private investment in these countries. From these findings, we recommend governments in developing countries should improve regulatory quality, promote the rule of law, respect voice and accountability, enforce control of corruption, improve government effectiveness, and promote political stability to attract more remittance inflows and promote private investment.