Migrants’ remittances may stimulate domestic investment in the country of origin, due to the moderating role of local institutions and financial sector development. I test this proposition using a balanced panel data of five Sub-Saharan African countries from 1984 to 2014. Panel fixed effects are used as the estimation technique. In a fixed effect regression of remittances and institutional development on domestic investment, while controlling for the level of economic development, the estimates indicate that remittances exert a significant positive effect on domestic investment. Also, the interaction effect of remittances and institutions shows that political institution serves as a mechanism through which remittances impact domestic investment. Besides, the interaction of financial development and remittances yields a modest impact on investment. The findings indicate that the effect of remittances on investment are larger in the presence of better financial institutions. Hence, policy makers are encouraged to improve institutions in the five countries studied in particular and Africa as a whole.
Ibrahim Issifu (Thu,) studied this question.