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Impact of FDI, ODA and Migrant Remittances on Economic Growth in Developing Countries: A Systems Approach

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Abstract

This article seeks to investigate the relative contributions of foreign direct investment, official development assistance and migrant remittances to economic growth in developing countries. We use a systems methodology to account for the inherent endogeneities in these relationships. In addition, we also examine the importance of institutions, not only for growth directly, but for the interactions between institutions and the other sources of growth. It is, we believe, the first article to consider each of these variables together. We find that all sources of foreign capital have a positive and significant impact on growth when institutions are taken into account.

Abstract

Cet article a pour but d’étudier les contributions relatives des investissements directs étrangers (IDE), de l’aide publique au développement (APD) et des envois de fonds des migrants à la croissance économique des pays en développement. Nous mobilisons une méthodologie de systèmes pour rendre compte des endogénéités inhérentes à ces relations. En outre, nous examinons l’importance des institutions, non seulement pour la croissance directement, mais aussi dans les interactions entre les institutions et les autres sources de croissance. Cet article est, à notre connaissance, le premier à prendre en compte simultanément chacune de ces variables. Nous constatons que toutes les sources de capitaux étrangers ont un effet positif et significatif sur la croissance lorsque les institutions sont prises en compte

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Notes

  1. Where (1−λ) is the share of remittances for domestic consumption.

  2. This variable is included to determine whether remittances have a greater impact on countries with a higher level of Human Development. To calculate this variable, we split the sample into two. Countries included in the category ‘Medium Human Development’ according to the World Bank Human Development Report (2006) are coded 1. Countries in the category ‘Low Human Development’ are coded 0. This variable is then interacted with Migrant Remittances. It is important to point out that the HDI score does not change overtime; we just use the 2006 data.

  3. For both equations, the random-effects estimator rejects the restriction of fixed effects.

  4. With panel data, there is also the concern that the standard errors on some coefficients are biased downwards because of correlation across years. The standard ‘clustering’ algorithm is used to allow for this – see, for example, Petersen (2008). However, in practice, the panels used here are relatively unbalanced, such that the difference between the clustered and unclustered standard errors is small.

  5. We also ran a number of Chow-type tests for a more restricted model excluding the regional dummies to test for differences between continents or between levels of development. These however did not yield any significant differences between the various subsamples. It should be stressed that given the number of countries, and the number of coefficients for the full simultaneous model, there are few degrees of freedom even if we divide into only three subsamples.

  6. The last period is only 4 years.

  7. The data available in the WDI for the variable migrant remittances are entitled ‘workers’ remittances, compensation of employees and migrant transfers’. Giuliano and Ruiz-Arranz (2009) use this measure and find that for some countries the inclusion of ‘compensation of employees’ (which is often payments to embassy staff, or the like) can bias the remittance data. We do not make these adjustments as they do acknowledge that the correlation pre and post adjustment remains at 0.92. In addition, we acknowledge that remittances through informal channels may be substantial.

  8. The start data of 1984 is chosen because the ICRG data began that year.

  9. Table A3 in the Appendix produces results for single-equation estimates for each of the four equations. These estimates are derived using GMM, but clearly show that the 3SLS system approach yields more reliable results.

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Acknowledgements

The authors gratefully acknowledge the financial support from the ESRC under RES-062-23-0986.

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  1. Aston Business School, Birmingham, UK

    Nigel Driffield & Chris Jones

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  1. Nigel Driffield
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Appendix

Appendix

Table A1

Table A1 Descriptive statistics
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Table A2

Table A2 Variable correlations
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Table A3

Table A3 Single equation GMM
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Driffield, N., Jones, C. Impact of FDI, ODA and Migrant Remittances on Economic Growth in Developing Countries: A Systems Approach. Eur J Dev Res 25, 173–196 (2013). https://doi.org/10.1057/ejdr.2013.1

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