Impact Of Remittances And FDI On Economic Growth Of Developing Countries

International capital flows have generally been considered crucial for economic growth. International capital inflows from different sources such as Foreign Direct Investment (FDI), Official Development Assistance (ODA) and in recent times, Remittances have gained importance in these analyses. Empirical evidences on the impact of FDI and Remittances on economic growth are rather mixed than being unanimous. In this context, the aim of this study is to make an empirical contribution to explore the impact of FDI and Remittances on the economic growth of selected developing countries.This study differs from other studies by using new panel dataset, variables and different methodologies. A panel dataset of33developing countries observed from2000to2011are examined to explore the impact of both Remittances and FDI on economic growth. Theoretical foundation and empirical works related to remittance and economic growth mainly point towards two types of approach for Remittances. One is "Endogenous approach" where the reason of remitting money is purely altruism. Thus remittance flows by altruistic migrants seem to be predictable and counter-cyclical. Another approach is "portfolio approach" where the reason for remitting money to the home country depends on the self-interest. Migrants who care about diversifying their portfolio would have a tendency to equalize return on financial and fixed assets in their host and home countries. These Remittances would tend to be pro-cyclical and behave like capital flows. Large scale of remittance inflows can be expected to potentially have positive effects on the economic growth in the receiving economies. The overall effect of Remittances on growth is not clear at a theoretical level, whether or not the positive effects surpass the negative impacts is a purely empirical question.FDI is an important source of externai finance for the developing countries. Developing countries have plenty of resources but are economically weak with a scarcity in finance, technology and competitive management. FDI initiates and introduces new management practices, new technology, knowledge, skills, etc. to the recipient economy. The association between FDI and economic growth also has mixed results for the developing countries. There have been debates on the impact of FDI on economic growth of developing countries.On the basis of relative importance of Remittances and FDI to the developing countries, this study empirically analyzes the impact of Remittances and FDI on economic growth for the selected developing countries over the period of2000to2011.The analysis has been conducted based on static and dynamic panel data approach of economic growth. The first consideration is to estimate the panel data static model with fixed effects estimation to control for unobserved heterogeneity across the developing countries in sample. Controlling for other conventional sources of growth the study found that Physical capital investment, Human capital investment and financial development has statistically significant positive impact on economic growth. Government consumption has statistically significant negative impact on economic growth across the developing countries in sample over the study period. The result indicates that FDI has positive and statistically significant impact on economic growth across the developing countries in sample over the study period. The impact of Remittances is negative and statistically insignificant in static model which implies that there is no direct impact of Remittances on economic growth.However, one of the potential problems concerned with estimation of the impact of Remittances and FDI on economic growth is endogeneity. It is common in the economic growth regression that some of the explanatory variables are endogenous. According to the theory, FDI and Remittances are endogenous to economic growth. To correct for endogeneity problem next consideration is to estimate the dynamic panel data model. Generalized Method of Moments (GMM) estimation technique is used to estimate the model. In both dynamic and static framework, the study has found a positive and statistically significant impact of FDI on the economic growth for the developing countries in sample. The result suggests that FDI has the potential of improving economic growth for the developing countries in sample. After controlling for potential endogeneity bias the study reveals that remittance has significant negative impact on the economic growth across the developing countries in sample over the study period. The result indicates that most remittance receipts are not channeled to productive uses and the motive of remitting to the home country economies is mostly altruistic rather than profit driven. The full benefit of Remittances can be gained by formulation of policy measures to channel Remittances into some economically productive uses. Finally, this study provides some policy suggestions to leverage the potential of Remittances and FDI for sustainable economic growth of developing countries.