The Crowding-in Impact of Remittance Inflows on Private Investment in Developing Economies: Does Institutional Setting Matter?

Abstract

Remittance inflows play a vital role in fostering economic development in developing economies. They make substantial contributions by effectively addressing trade balance deficits, elevating the living standards of recipients, strengthening foreign exchange reserves, and reducing dependence on highinterest foreign capital. Moreover, institutional quality can further attract remittance inflows and enhance private investment. Does institutional quality harm the remittance inflows–private investment nexus? This study seeks answers by utilizing the two-step system GMM estimator and defactored instrumental variables estimators to examine the impacts of remittance inflows, institutional quality, and their interaction term on private investment in 91 developing economies from 2002 to 2020. The results present a counterintuitive pattern: remittance inflows increase private investment while institutional quality decreases it. However, the interaction term promotes private investment. Furthermore, economic growth, labor force, and inflation positively influence private investment. These findings provide some implications for the policymaking strategies of governments in developing economies.