Published on Let's Talk Development

Remittances go beyond helping families to funding small businesses

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Migrant remittances overtook FDI last year as the largest foreign capital inflow into developing countries. Over US$435b was sent back home in 2014, and the total is expected to exceed $460b by the end of 2015. 
We know that remittances help finance a range of household needs back home:  food, clothing, school fees and visits to the doctor; home repairs and construction; purchase of a truck or other durable good; and repayment for money advanced when the migrant first went abroad. 
Under certain circumstances, however, remittances are used for commercial investments rather than household consumption.
In a 2011 review of the remittance research in the Journal of Economic Perspectives, David Yang notes that remittances are more likely to flow into small businesses in more remote, rural areas and in the aftermath of natural catastrophes - both instances where capital access is typically constrained.  One of us published a new paper last July in the Journal of Business Venturing documenting a greater positive impact for remittances on new business founding rates in developing countries with larger informal economies. Additional survey evidence compiled by Ria Financial, a major multinational money transfer organization (MTO) based in Madrid, Spain, suggests that between 2% and 15% of remittances sent back to developing countries are intended to help fund or found a new business or help an existing business grow.
Even a seemingly measly 2% of $435b, which translates to $8.7b, merits greater notice and study by the Bank, perhaps with some program initiatives to help migrants when they shift in role from transnational household financier to transnational entrepreneur.
We wanted to understand when that shift took place.  In an MFM Practice Note published last month, we reported results from a study of remittances, home-country capital access and new business start trends for 47 developing countries observed from 2002-2007.  We regressed the count of registered new businesses each year on previous-year remittances, capital access and the interaction of these two terms.  We used annual counts of new businesses on official registries, which almost certainly understates the actual number of new businesses in most developing countries analyzed.  We also used alternative measures of capital access:  two measures of general capital access to all country businesses and venture capital access for new, growing businesses; and a measure of access to bank loans to fund new businesses. 
Here is what we found:  1) in two of four estimations, greater capital access increased new business counts; 2) in three of four estimations, greater remittances increased new business counts; and 3) in all four estimations, the positive new business founding effect of remittances diminished with greater capital access.   Remittances increase annual new business starts –even if their number are understated— but only for developing countries with the most constrained capital access, that is, in the lowest quartile or quintile of our 47 sampled countries. 
So migrants shift their use of remittances when capital constraints are severe as they are in many Sub-Saharan African countries.  We think this finding creates an opportunity for more study and perhaps experimentation by the Bank.  If we know countries where remittances are more likely to go for business investment, then the Bank can work with remitting banks, MTOs and related sending institutions to help them develop value-added products and services for these transnational entrepreneurs.  For example, MTOs like Ria could offer remittance recipients in the home country referrals to legal and accounting professionals able to help their micro-businesses more quickly move from the informal to formal commercial sector and take advantage of legal and regulatory protections vital to their long-term survival and growth.  The Economist recently argued for easing business regulations to reduce the cost of sending remittances.  The more we know about where these capital inflows are going when, the more we can do to enhance their intended use and thereby promote entrepreneurial, private sector-led economic growth and poverty reduction in some of the least-developed countries of the world. 


Marek Hanusch

Lead Economist and Program Leader in the World Bank’s Practice Group for Equitable Growth, Finance and Institutions

Paul Vaaler

Chair in Law & Business, University of Minessota

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