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
Similar content being viewed by others
Notes
Where (1−λ) is the share of remittances for domestic consumption.
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.
For both equations, the random-effects estimator rejects the restriction of fixed effects.
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.
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.
The last period is only 4 years.
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.
The start data of 1984 is chosen because the ICRG data began that year.
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.
References
Acemoglu, D., Johnson, S. and Robinson, A. (2001) The colonial origins of comparative development: An empirical investigation. American Economic Review 91 (5): 1369–1401.
Adams Jr, R.H. and Cuecuecha, A. (2010) Remittances, household expenditure and investment in Guatemala. World Development 38 (11): 1626–1641.
Ades, A. and Di Tella, R. (1999) Rents, competition and corruption. American Economic Review 89 (4): 982–993.
Aghion, P. and Howitt, P. (1992) A model of growth through creative destruction. Econometric Society 60 (2): 323–351.
Agosin, M. and Machado, R. (2005) Foreign investment in developing countries: Does it crowd in domestic investment? Oxford Development Studies 33 (2): 149–162.
Aitken, B.J. and Harrison, A.E. (1999) Do domestic firms benefit from direct foreign investment? Evidence from Venezuela? American Economic Review 89 (3): 605–618.
Alesina, A. and Weder, B. (2002) Do corrupt governments receive less foreign aid? American Economic Review 92 (4): 1126–1137.
Anderson, T.W. and Hsiao, C. (1981) Estimation of dynamic models with error components. Journal of the American Statistical Association 76 (375): 598–606.
Arellano, M. and Bond, S. (1991) Some tests for specification of panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies 58 (2): 277–297.
Azman-Saini, W.N.W., Law, S.H. and Halim, A. (2010) FDI and economic growth: New evidence on the role of financial market. Economics Letters 107 (2): 211–213.
Babecký, J. and Campos, N.F. (2011) Does reform work? An econometric survey of the reform–growth puzzle. Journal of Comparative Economics 39 (2): 140–158.
Balasubramanyam, V.N., Salisu, M. and Sapsford, D. (1996) Foreign direct investment and growth in EP and IS countries. The Economic Journal 106 (434): 92–105.
Baltagi, B.H. (1981) Simultaneous equations with error components. Journal of Econometrics 17 (2): 189–200.
Baltagi, B.H. and Li, Q. (1992) A note on the estimation of simultaneous equations with error components. Econometric Theory 8: 113–119.
Barajas, A., Chami, R., Fullenkamp, C., Gapen, G. and Montiel, P. (2009) Do Workers’ Remittances Promote Economic Growth? IMF Working Paper 09/153.
Barro, R.J. (1991) Economic growth in a cross section of countries. The Quarterly Journal of Economics 106 (2): 407–443.
Barro, R.J. and Lee, J. (2000) International Data on Educational Attainment. CID Working Paper no. 42.
Bauer, P.T. (1972) Dissent on Development. Cambridge, MA: Harvard University Press.
Blundell, R. and Bond, S. (1998) Initial conditions and moment conditions in dynamic panel data models. Journal of Econometrics 87 (1): 115–143.
Boerner, K. and Hainz, C. (2009) The political economy of corruption and the role of economic opportunities. Economics of Transition 17 (2): 213–240.
Borensztein, E., De Gregorio, J. and Lee, J.W. (1998) How does foreign direct investment affect economic growth? Journal of International Economics 45 (1): 115–135.
Brautigam, D. and Knack, S. (2004) Foreign aid, institutions, and governance in Sub-Saharan Africa. Economic Development and Cultural Change 52 (2): 255–285.
Burnside, C. and Dollar, D. (1997) Aid, Policies, and Growth. The World Bank. Policy Research. Working Paper Series 1777.
Burnside, C. and Dollar, D. (2000) Aid, policies, and growth. American Economic Review 90 (4): 847–868.
Burnside, C. and Dollar, D. (2004) Aid, policies, and growth: Reply. American Economic Review 94 (3): 781–784.
Canales, A.I. (2002) El papel de las remesas en la capacidad de ahorro e inversión de los hogares en México. In: J. Montoya (ed.) Memorias del Encuentro Nacional: La Población en México, Cambio Demográfico y Consecuencias Sociales. Universidad Autónoma del Estado de México.
Catrinescu, N., Leon-Ledesma, M., Piracha, M. and Quillin, B. (2009) Remittances, institutions, and economic growth. World Development 37 (1): 81–92.
Chami, R., Fullenkamp, C. and Jahjah, S. (2003) Are Immigrant Remittance Flows a Source of Capital for Development? Washington: International Monetary Fund. IMF Working Papers 03/189.
Chauvet, L. and Guillaumont, P. (2004) Aid and growth revisited: Policy, economic vulnerability, and political instability. In: Tungodden, B., Stern, N. and Kolstad, I. (eds.) Toward Pro-Poor Policies. Aid, Institutions, and Globalization. Washington and New York: World Bank and Oxford University Press, pp. 95–109.
Coricelli, F., Driffield, N.L., Roland, I and Pal, S. (2012) When does leverage hurt productivity growth? A firm level analysis. Journal of international Money and Finance 31 (6): 1674–1694.
Cornwell, C., Schmidt, P. and Wyhowski, D. (1992) Simultaneous equations and panel data. Journal of Econometrics 51 (1–2): 151–181.
Chowdhury, A. and Mavrotas, G. (2006) FDI and growth: What causes what? The World Economy 29 (1): 9–19.
Doucouliagos, H. and Paldam, M. (2006) Aid effectiveness on accumulation: A meta study. Kyklos 59 (2): 227–254.
Dreher, A., Kotsogiannis, C. and McCorriston, S. (2007) Corruption around the world: Evidence from a structural model. Journal of Comparative Economics 35 (3): 443–466.
Easterly, W. (2012) The cartel of good intentions: The problem of bureaucracy in foreign aid. The Journal of Policy Reform 5 (4): 223–250.
Easterly, W., Levine, R. and Roodman, D. (2004) Aid, policies, and growth: Comment. American Economic Review 94 (3): 774–780.
Giuliano, P. and Ruiz-Arranz, M. (2009) Remittances, financial development and growth. Journal of Development Economics 90 (1): 144–152.
Görg, H. and Greenaway, D. (2004) Much ado about nothing? Do domestic firms really benefit from foreign direct investment? World Bank Research Observer 19 (2): 171–197.
Greene, W.H. (1993) Econometric Analysis, 5th edn. New York: Palgrave Macmillan.
Grossman, G.M. and Helpman, E. (1991) Trade, knowledge spillovers, and growth. European Economic Review 35 (2–3): 517–526.
Guillaumont, P. and Chauvet, L. (2001) Aid and performance: A reassessment. Journal of Development Studies 37 (6): 66–92.
Haddad, M. and Harrison, A. (1993) Are there positive spillovers from foreign investment? Evidence from panel data for Morocco. Journal of Development Economics 42 (1): 51–74.
Hansen, H. and Rand, J. (2006) On the causal links between FDI and growth in developing countries. The World Economy 29 (1): 21–41.
Hansen, H. and Tarp, F. (2001) Aid effectiveness disputed. Journal of Development Economics 64 (2): 547–570.
Harrison, A. (1996) Openness and growth: A time-series, cross-country analysis for developing countries. Journal of Development Economics 48 (1): 419–447.
Hausman, J.A. (1978) Specification tests in econometrics. Econometrica 46 (6): 1251–1271.
Herzer, D., Klasen, S. and Nowak-Lehmann, F. (2007) In search of FDI-Led growth in developing countries. Economic Modelling 25 (5): 793–810.
Holtz-Eakin, D., Newey, W. and Rosen, H.S. (1988) Estimating vector autoregressions with panel data. Econometrica 56 (6): 1371–1395.
Kmenta, J. (1997) Elements of Econometrics, 2nd edn. University of Michigan Publishing.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R.W. (1997) Legal determinants of external finance. Journal of Finance 52 (3): 1131–1150.
Landes, D.S. (1998) The Wealth and Poverty of Nations. New York: W.W. Norton.
Lim, E. (2001) Determinants of, and the Relation Between, Foreign Direct Investment and Growth: A Summary of the Recent Literature. IMF Working Paper no. 01/175.
Lucas, R.E.B. (2005) International Migration and Economic Development. Stockholm: Expert Group on Development Issues, Swedish Ministry for Foreign Affairs.
Mankiw, N.G., Romer, D. and Weil, D.N. (1992) A contribution to the empirics of economic growth. The Quarterly Journal of Economics 107 (2): 407–437.
North, D. (1981) Structure and Change in Economic History. Norton.
North, D. (1990) Institutions, Institutional Change and Economic Performance. Cambridge University Press.
Petersen, M.A. (2008) Estimating standard errors in finance panel data sets: Comparing approaches. Review of Financial Studies 22 (1): 435–480.
Pradhan, G., Upadhyay, M. and Upadhyaya, K. (2008) Remittances and economic growth in developing countries. European Journal of Development Research 20 (3): 497–506.
Riddell, R.C. (2008) Does Foreign Aid Work. Oxford: Oxford University Press.
Rivera-Batiz, L.A. and Romer, P.M. (1991) International trade with endogenous technological change. European Economic Review 35 (4): 971–1001.
Rodrik, D. (2000) Institutions for High-Quality Growth: What they are and How to Acquire Them. National Bureau of Economic Research, Inc. NBER Working Papers 7540.
Rodrik, D. (2004) Getting Institutions Right. CESifo DICE Report 2 (2): 10–15.
Romer, P.M. (1990) Endogenous technological change. Journal of Political Economy 98 (5): 71–102.
Sachs, J.D. and Warner, A. (1995) Economic Reform and the Process of Global Integration. Brookings Papers on Economic Activity 1: 1–118.
Sen, A. (1999) Development as Freedom. Oxford University Press.
Smarzynska-Javorcik, B. (2004) Does foreign direct investment increase the productivity of domestic firms? In search of spillovers through backward linkages. The American Economic Review 94 (3): 605–627.
Solow, R. (1956) A contribution to the theory of economic growth. The Quarterly Journal of Economics 70 (1): 65–94.
Stern, N.H. (1974) Professor Bauer on development. Journal of Development Economics 1 (3): 191–211.
Stehrer, R. and Woerz, J. (2009) Attract FDI! – A universal golden rule? Empirical evidence for OECD and selected non-OECD countries. The European Journal of Development Research 21 (1): 95–111.
Svensson, J. (1999) Aid, growth and democracy. Economics and Politics 11: 275–297.
Taylor, J.E. (1992) Remittances and inequality reconsidered: Direct, indirect, and intertemporal effects. Journal of Policy Modeling 14 (2): 187–208.
Temple, J. (1999) The new growth evidence. Journal of Economic Literature 37 (3): 112–156.
Vu, T.B. and Noy, I. (2009) Sectoral analysis of foreign direct investment and growth in the developed countries. Journal of International Financial Markets, Institutions and Money 19 (2): 402–413.
Woodruff, C. and Zenteno, R. (2001) Remittances and Microenterprises in Mexico. UCSD Working Paper.
Wooldridge, J. (2002) Econometric Analysis of Cross Section and Panel Data. MIT Press.
Acknowledgements
The authors gratefully acknowledge the financial support from the ESRC under RES-062-23-0986.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
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
Published:
Issue Date:
DOI: https://doi.org/10.1057/ejdr.2013.1