Remittances, institutional quality and investment in Sub-Saharan Africa

Abstract

PurposeThis paper investigates the relationship between remittances, institutional quality and investment in Sub-Saharan African (SSA) countries using data from 2004 to 2018.Design/methodology/approachThe two-stage least squares (2SLS) estimator is the main methodology used, while the system generalized method of moments (Sys-GMM) technique is employed to test the robustness of the results.FindingsThe results show a positive and significant impact of remittances on investment in SSA. The findings further reveal a substitutional linkage between remittances and institutions in promoting investment. In essence, remittances serve as investment capital in countries with poor institutions. The results also show that the marginal significance of remittances as a source of funds for investment decreases in countries with well-developed institutions.Research limitations/implicationsThe sample excludes some of the SSA countries due to the unavailability of data.Practical implicationsIn the face of current institutional weaknesses, there is a need for SSA countries to prioritize policies that encourage the effective use of remittances for business activities. Furthermore, SSA countries must improve their economic freedom and democratic practices by reducing government size, protecting property rights, and promoting respect for political and civil rights.Originality/valueThis is the first study to analyze the relationship between remittances, institutional quality and investment in SSA. It also provides a novel framework for future research on the remittance–investment nexus.

Empirical evidence on the relationship between migrants' remittances and private investment in Burkina Faso: A dynamic simultaneous equation model

“…If the credit market in the home country does not allow households to overcome their liquidity constraints, migration would be a strategy to meet increased financing needs for household investment. This reflects the interdependence between migrant remittances and private investment, which is also highlighted in the empirical literature (Adams et al, 2008;Hossain & Hasanuzzaman, 2013;Khan et al, 2019;Mohammed & Karagol, 2023;. This research shows that there may be a reciprocal causality between these two variables.…”

“…private investment in sub-Saharan African countries characterized by low institutional quality (Mohammed & Karagol, 2023).…”

“…The empirical literature on the relationship between remittances and private investment has mixed results. Several studies highlight the positive effect of remittances on private investment (Baldé, 2011; Hossain & Hasanuzzaman, 2013; Kapingura, 2018; Mohammed & Karagol, 2023; Okodua, 2013). Using a static fixed effects panel for 34 sub‐Saharan African countries, Baldé (2011) shows that remittances can have positive effects on economic growth through private investment.…”

“…Kapingura (2018) using the pool mean group model shows that migrant remittances achieve a higher investment rate than domestic savings. More recently, Mohammed and Karagol (2023) used a dynamic panel to show that migrant remittances improve private investment. On the other hand, several studies find an insignificant (Bjuggren et al, 2010; Okeke & Chinanuite, 2022) or negative (Bon, 2023; Eftimoski & Josheski, 2021; Olubiyi, 2013; Su et al, 2021; Tung, 2018) effect of remittances on private investment.…”

“…Kapingura (2018) using the pool mean group model shows that migrant remittances achieve a higher investment rate than domestic savings. More recently, Mohammed and Karagol (2023) used a dynamic panel to show that migrant remittances improve private investment.…”