The Effect of Remittances on Domestic Capital Formation in Select African Countries: A Comparative Empirical Analysis

Abstract

Remittances are expected to affect domestic investment, among others, through induced rise in savings and easing of financial constraints. However, the empirical evidence on the relationship between the two variables is rather thin, especially in the context of Africa. This study investigates the short-run and long-run effects of remittances on domestic investment in four African countries using the bounds testing approach to cointegration analysis. The findings of the study indicate that whether remittances spur domestic capital formation varies by country and the time horizon considered, highlighting, among others, the importance of identifying the factors that tend to condition their relationship.

Workers’ Remittances and Domestic Investment in South Asia: A Comparative Econometric Inquiry

“…Hassan and Salim () suggested the accelerator theory for Bangladesh, urging insensitivity of interest rate; similarly, Waheed () also reported insignificant effect in Pakistan. Following Yiheyis and Woldemariam (), the augmented accelerator models of domestic investment for selected four South Asian countries are presented in Equation 1 below:where INV presents domestic investment, REM is personal remittance inflow (which is equal to personal transfers and compensation to employees), PCGDP is gross domestic product per head, FDI is foreign direct investment; ED is net external debt inflow, and ODA is official development assistance.…”

“…extend of credit constraint, marginal propensity to consume, consumption preferences, magnitude, and allocation. The findings of reviewed empirical literature reveal varying effects across the countries and time, considered, (Al‐Assaf and Al‐Tarawneh, ; Yiheyis and Woldemarian, ). Other capital flows, i.e.…”

“…Plaza et al, () urged that this channel can promote domestic investment in small and medium‐sized business and real stat. Fourth, the inflow of foreign capital in the form of remittances can increase domestic money supply and reduce the discount rate, which induce domestic investment activities, (Yiheyis and Woldemariam, ).…”

“…The findings conclude significant positive effect. In the most recent studies, Yiheyis and Woldemariam () investigated the effect of workers' remittances on domestic investment in four sub‐Saharan African countries, i.e. Burkina Faso, Nigeria, Kenya, and Senegal, using long time series data.…”

“…Empirical studies on workers’ remittance and domestic investment in developing countries are relatively thin with no any reasonable study in South Asia. Yiheyis and Woldemariam () have explored the long‐term and short‐term effect of workers’ remittances on domestic investment in four Sub Saharan African countries, i.e. Burkina Faso, Nigeria, Kenya, and Senegal and concluded variation across the countries considered.…”