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Theoretical and Applied Economics
No. 4 / 2018 (617), Winter

Do remittances really attract foreign direct investments? Evidence from panel cointegration

Mercy Laita PALAMULENI
College of Business, McNeese State University, Lake Charles, USA

Abstract. This paper examines the long-run relationship between remittance inflows and Foreign Direct Investments (FDI) for 47 developing countries over the period 1980-2014. Panel cointegration techniques that are robust to omitted variable bias, slope heterogeneity and crosssectional dependency are employed. The main results are that remittance flows have some small but positive effects on FDI; however, the results vary by both region and country. Specifically, the positive relationship strongly holds in African countries and high remittance recipient countries but not for Asian and Latin American countries. The causality test suggests that the relationship is bidirectional. These results have important policy implications to developing countries. For example they suggest that policies aimed at increasing remittance inflows also attracts more FDI in some countries and also that remittance inflows be viewed as being both a cause and a consequence of FDI.

Keywords: Remittance, FDI, Panel cointegration.

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