Remittances and domestic investment in Africa: do banking sector development and quality governance matter?

Abstract

Migrant remittances to home countries have seen a significant increase over the years, especially in developing countries where due to a lack of jobs or unfavourable working conditions, citizens move to advanced countries to better their economic conditions and their dependents in home countries. This has been facilitated by globalisation in modern times. Whereas most previous studies have delved more into remittances and their impact on economic growth, less studies have examined the link between remittances and domestic investment. This study examined the impact of remittances on domestic investment in Africa using a system GMM econometric estimator. Our study departs from the few studies that examined this link by further investigating the moderating role of banking sector development and quality governance on the link between remittances and domestic investment. Using data from 41 African countries from 2004 to 2018, the study discovered that migrant remittances have a direct negative impact on domestic investment in home countries. The study, however, found that both banking sector development and quality governance significantly positively impact domestic investment in Africa. Thus, when we interacted banking sector development and good governance separately with remittances, each interactive term had a significant positive impact on domestic investment. This means that for remittances to influence domestic investment, banking sector and good governance will need to be improved.