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The effects of remittances, foreign direct investment, and foreign aid on economic growth: An empirical analysis

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  • Graham Bird
  • Yongseok Choi

Abstract

The Sustainable Development Goals have refocused attention on ways of providing external finance to support development. Because they have different motivations and work through different modalities, remittances, foreign direct investment (FDI), and official development assistance may be expected to have different consequences for economic growth. Existing empirical evidence suggests that both positive and negative effects are associated with each source of finance. We use both a dynamic panel model and a fixed effects model to calculate the overall effects of each source of finance in isolation and taken together over the period 1976–2015. We include a range of control variables to allow for other potential influences on economic growth. We disaggregate the effects across geographical regions and income levels to test for heterogeneity. We also undertake a series of robustness checks. Our results suggest that FDI has a significant positive effect on economic growth, whereas remittances have a significant and negative effect. The effect of foreign aid is more ambiguous but is usually insignificant. The article offers an interpretation of the results drawing on ideas from the relevant theory.

Suggested Citation

  • Graham Bird & Yongseok Choi, 2020. "The effects of remittances, foreign direct investment, and foreign aid on economic growth: An empirical analysis," Review of Development Economics, Wiley Blackwell, vol. 24(1), pages 1-30, February.
    • Handle: RePEc:bla:rdevec:v:24:y:2020:i:1:p:1-30
    DOI: 10.1111/rode.12630
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    Cited by:

    1. Nabila Khurshid & Hamza Sharif & Mosab I. Tabash & Basem Hamouri & Asma Fiaz & Fozia Munir, 2023. "Analyzing the Impact of Foreign Capital Inflows and Political Economy on Economic Growth: An Application of Regime Switching Model," Economies, MDPI, vol. 11(7), pages 1-17, June.
    2. Huong, Tran Thi Lan & Ha, Le Thanh, 2023. "A comprehensive analysis of the correlation between foreign aid and energy security in emerging countries: Does institutional quality matter?," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 952-968.
    3. Acheampong, Alex O. & Appiah-Otoo, Isaac & Dzator, Janet & Agyemang, Kwabena Koforobour, 2021. "Remittances, financial development and poverty reduction in Sub-Saharan Africa: Implications for post-COVID-19 macroeconomic policies," Journal of Policy Modeling, Elsevier, vol. 43(6), pages 1365-1387.
    4. Taiwo, Kayode, 2020. "Do remittances spur economic growth in Africa?," MPRA Paper 111029, University Library of Munich, Germany, revised 2021.
    5. Yao Hongxing & Olivier Joseph Abban & Alex Dankyi Boadi, 2021. "Foreign aid and economic growth: Do energy consumption, trade openness and CO2 emissions matter? A DSUR heterogeneous evidence from Africa’s trading blocs," PLOS ONE, Public Library of Science, vol. 16(6), pages 1-25, June.
    6. Gildas Dohba Dinga & Dobdinga Cletus Fonchamnyo & Giyoh Gideon Nginyu & Chuo Joshua Njuh, 2020. "Short and Long Run Dynamic Common Correlation Effects of External Capital Inflow on Economic Growth in SSA Countries," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 8(4), pages 218-226, December.
    7. Hou, Yulin & Jia, Shaomeng, 2023. "Do remittances react to commodity windfall? Evidence from Latin America and the Caribbean," Economic Modelling, Elsevier, vol. 121(C).
    8. Tim Röthel, 2023. "Budget support to the health sector—The right choice for strong institutions? Evidence from panel data," Review of Development Economics, Wiley Blackwell, vol. 27(2), pages 735-770, May.
    9. Imen Mohamed Sghaier, 2021. "Foreign Financial Flows, Human Capital and Economic Growth in North African Countries," Economic Alternatives, University of National and World Economy, Sofia, Bulgaria, issue 3, pages 355-371, September.
    10. Wen, Jun & Farooq, Umar & Tabash, Mosab I. & El Refae, Ghaleb A. & Ahmed, Jaleel & Subhani, Bilal Haider, 2021. "Government green environmental concerns and corporate real investment decisions: Does financial sector development matter?," Energy Policy, Elsevier, vol. 158(C).
    11. Antonio Sianes & Luis A. Fernández-Portillo & Adela Toscano-Valle & Elena Pérez-Velasco, 2023. "Heterogeneity in financing for development strategies as a hindering factor to achieve a global agreement on the 2030 Agenda," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-13, December.
    12. Isaac Ofoeda & Elikplimi Komla Agbloyor & Joshua Yindenaba Abor & Kofi Osei Achampong, 2022. "Foreign direct investment, anti‐money laundering regulations and economic growth," Journal of International Development, John Wiley & Sons, Ltd., vol. 34(3), pages 670-692, April.
    13. Muhammad Azam & Yi Feng, 2022. "Does foreign aid stimulate economic growth in developing countries? Further evidence in both aggregate and disaggregated samples," Quality & Quantity: International Journal of Methodology, Springer, vol. 56(2), pages 533-556, April.
    14. Jun Wen & Umar Farooq & Suhaib Anagreh & Mosab I. Tabash, 2022. "Quality of governance and corporate real investment: Assessing the impact of foreign aid," Bulletin of Economic Research, Wiley Blackwell, vol. 74(4), pages 1115-1134, October.
    15. Imen Mohamed Sghaier, 2022. "Foreign Capital Inflows and Economic Growth in North African Countries: the Role of Human Capital," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 13(4), pages 2804-2821, December.
    16. Boateng, Elliot & Agbola, Frank W. & Mahmood, Amir, 2021. "Foreign aid volatility and economic growth in Sub-Saharan Africa: Does institutional quality matter?," Economic Modelling, Elsevier, vol. 96(C), pages 111-127.

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