Remittances, institutional quality and investment in Sub-Saharan Africa

Abstract

Purpose – This paper investigates the relationship between remittances, institutional quality and investment in Sub-Saharan African (SSA) countries using data from 2004 to 2018. Design/methodology/approach – The two-stage least squares (2SLS) estimator is the main methodology used, while the system generalized method of moments (Sys-GMM) technique is employed to test the robustness of the results. Findings – The results show a positive and significant impact of remittances on investment in SSA. The findings further reveal a substitutional linkage between remittances and institutions in promoting investment. In essence, remittances serve as investment capital in countries with poor institutions. The results also show that the marginal significance of remittances as a source of funds for investment decreases in countries with well-developed institutions. Research limitations/implications – The sample excludes some of the SSA countries due to the unavailability of data. Practical implications – In the face of current institutional weaknesses, there is a need for SSA countries to prioritize policies that encourage the effective use of remittances for business activities. Furthermore, SSA countries must improve their economic freedom and democratic practices by reducing government size, protecting property rights, and promoting respect for political and civil rights. Originality/value – This is the first study to analyze the relationship between remittances, institutional quality and investment in SSA. It also provides a novel framework for future research on the remittance–investment nexus.

Keywords

• 2SLS
• Generalized method of moments
• Institutions
• Investment
• Remittances