UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM THE NETHERLANDS PROGRAMME FOR M A IN DEVELOPMENT ECONOMICS '''' '''' '''' , REMITTANCES DOMESTIC I[.]
UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM- THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS ' ' ' , REMITTANCES- DOMESTIC INVESTMENT IN THE EAST AND SOUTHEAST ASIA A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN THI HAl YEN Academic Supervisor: Dr NGUYEN HUU DUNG HO CHI MINH CITY, NOVEMBER 2011 CERTIFICATION "I certificate that the substance of the thesis has not already been submitted for any degree and is not currently submitted for any other degree I certify that to the best of my knowledge and help received in preparing the thesis and all source~ used have been acknowledged in the thesis." Signature • Nguyen Thi Hai Yen Date: ACKNOWLEDGMENTS My deepest gratitude to all persons and organizations for their support, provision of assistance and information that made this thesis possible; My dearest thanks to my supervisor, Dr Nguyen Huu Dung, for his continuous support, constructive follow-up, and insightful, helpful comments; Thanks to the lecturers and staff of the project, who helped improve my knowledge and fulfill the programme; " My appreciation to Dr Cao Hao Thi & Mr Duy for their assistance in econometric techniques; Finally, I am indebted to my parents and my elder brother for their love for and support of me, keeping me in good condition for learning I would like to reserve the pleasure of the graduate for them I am also grateful to my close friends for their warm encouragement 11 ABSTRACT Over the past decades, remittances have grown to become one of the largest sources of external financial flows to developing countries, left ODA far behind and even exceeded FDI in some countries While it is undeniable that remittances have poverty-alleviating and consumption-smoothing effects on households in receiving economies, empirical questions are whether they directly impact investment and if not through which channels they have positive effects on investment This thesis goes in search of the answers to these questions by employing different methodologies including Ordinary Least Square, Fixed Effect and Generalized Method of Moments However, research scope is limited within some economies in East and South-east regions The results show that remittances have no direct impact on investment but when being combined other channels such as financial development and institution Remittances are complementary to financial development in stimulating investment Meanwhile, relationship between remittances and institution quality is not clear Some indicators indicate remittances are complementary to institution quality in boosting investment; whereas the others are substitutionary Key words: Remittances, Investment, East & Southeast Asia, Financial Development, Institution Quality 111 CONTENT CERTIFICATION i ACKNOWLEDGMENTS ii ABSTRACT iii CONTENT iv LIST OF TABLES i LIST OF ABBREVIATIONS ii CHAPTER 1: INTRODUCTION 1.1 Problem Statement 1.2 Research objectives 1.3 Research Questions 1.4 Research Methodology 1.5 Structure of the thesis CHAPTER II: LITERATURE REVIEW 2.1 The concepts of remittance 2.2 Motivation and economic effects of remittances 2.3 Relationship between remittances and investment 10 2.4 Empirical studies 14 CHAPTER III: RESEARCH METHODOLOGY 18 3.1 Data and variable description 18 3.1.1 Data 18 3.1.2 Description of variables ofinterest 19 3.2 Model specification & analytical steps 23 3.3 Methods of parameter estimations 24 ~ 3.3.1 Ordinary Least Squares (OLS) estimator 24 3.3.2 Fixed Effect (FE) estimator 25 3.3.3 Generalized Method of Moments (GMM) 27 3.3.4 Application of GMM estimator in the thesis corresponding to each specification 28 IV CHAPTER IV: EMPRICAL RESULTS 31 4.1 Descriptive statistics 31 4.1.1 Remittances in East and Southeast Asia 31 4.1.2 Investment and economic growth in East and Southeast Asia 32 4.1.3 Financial development, openness and lending interest rate in East and Southeast Asia 32 4.1.4 Institution quality in East and Southeast Asia 33 4.2 Bivariate correlation of the variables of interest 34 4.2.1 The relationship between remittances and variables of interest 34 • 4.2.2 The relationship between investment and the other variables 34 4.2.3 The relationship between financial development and other variables 36 4.3 Empirical Results 37 4.3 Examining the impact of remittances on domestic investment using OLS estimation technique 4.3.2 Examining the impact of remittances on domestic investment using fixed effect (FE) estimation technique 50 4.3.3 Examining the impact of remittances on domestic investment using Generalized Method of Moment (GMM) estimation technique 61 4.4 Brief discussion about the best model 73 CHAPTER V: CONCLUSION, RECOMMENDATION & LIMITATION 75 5.1 Conclusion 75 5.2 Policy recommendation 78 5.3 Limitation and suggestion for further study 80 REFERENCE 82 APPENDIX 88 v LIST OF TABLES Table 1: Variable description, Expected sign & Data Source 22 Table 2: OLS- REM 37 Table 3: OLS- REM- FD 39 Table 4: OLS - REM - FD (M2) - INST 43 Table 5: OLS- REM- FD (BANCRE)- INST 45 Table 6: OLS- REM- FD (PRlCRE)- INST 47 Table 7: FE -REM 50 Table 8: FE - REM - FD 52 Table 9: FE - REM - FD (M2) - INST 54 Table 10: FE - REM - FD (BANCRE) - INST 56 Table 11: FE -REM - FD (PRJCRE) - INST 58 Table 12:.GMM- REM 61 Table 13: GMM- REM- FD 63 Table 14: GMM- REM- FD (M2)- INST 66 Table 15: GMM- REM- FD (BANCRE)- INST 69 Table 16: GMM- REM- FD (PRICRE)- INST 70 Table A: Descriptive statistics on interested variables without institution quality 88 Table B: Descriptive statistics on institution quality indicators 88 Table C: Bivariate correlation of the variables of interest 89 LIST OF ABBREVIATIONS FD Financial Development FDI Foreign Direct Investment FE Fixed Effect GOP Gross Domestic Product GLS Generalized Least Square GMM Generalized Method of Moment IMF International Monetary Fund INST Institution ODA Official Development Assistance OLS Ordinary Least Square REM Remittances WB World Bank 11 - - - CHAPTER I: INTRODUCTION This chapter will explain the reason for carrying out the thesis, its objectives and research questions In addition, a brief of methodology is also mentioned in this part Finally, the structure of the thesis will be presented 1.1 Problem Statement: Rapid economic growth and sustained development are goals pursued by almost governments and policy-makers Investment is a crucial motive for growth and development process Investment, of course, requires capital Most of developing countries, unfortunately, usually encounter shortage of capital Capital source from domestic savings is rather limited due to living standard of residents generally is still low Therefore, attracting foreign capital flows is one of the leading national policies for development Regarding foreign capital flows, portfolio investment is high volatile and may cause negative effects for the economy without appropriate and active management (Silva et al., 2009) Foreign Direct Investment (FDI) with relatively stable characteristics compared to portfolio investment usually attracts lots of attention and interest thank to its big benefits such as capital supply, job creation, technology transfer, and managerial know-how FDI, however, typically requires a physical investment as well as transparency, stability and soundness in political environment and macroeconomic policies in the country A foreign capital flow which has recently received much interest from economists is remittances Remittances, the amount of money transferred by migrants to their families in home countries, have steadily increased since the mid1980s Statistically, recorded remittances reached an estimated volume of US$206 billion in 2006, compared to US$19.6 billion in 1985 (Ambrosius et al., 2008) The latest available data shows that remittance flows to developing countries reach US$328 billion, accounting for over 70% total global remittances in 2008 (see Key Indicators for Asia and the Pacific 2009) The volume of them is nearly the same with foreign direct investment and twice higher than official development aid that help them rank at the second position in term of external finance source for developing countries Moreover, out of non-trade foreign currency inflows, remittances are in general the most stable, least volatile (Chami et al., 2008; Global Development Finance 2003) Thanks to the characteristic of stability, these inflows may counter negative effects caused by the falling in capital flows such as FDI, debt, and equity flows in recipient countries during an economic downturn (Silva et al 2009) and hence consolidate macroeconomic stability (Bugamelli and Paterno, 2008) Furthermore, m developing countries, the financial system is commonly underdeveloped and the economy has a low degree of monetization since they usually suffer a low ratio of credit to GDP and a low ratio of broad money supply to GDP (Ambrosius et al., 2008) The authors insist: "A large proportion of the population and typic~lly the small and micro enterprises of the informal sector find difficult to access bank credit and thus operate outside the financial sector, with low capital intensity and low productivity" A recent study by Aggarwal et al (2005) shows that remittances promote financial development; whereas the finding of Bettin and Zazzaro (2009) holds that these inflows play substitute for underdeveloped financial sector in developing countries in stimulating investment and growth Remittances' impacts on poverty, education, inequality are extensively exploited; whereas research on remittances-investment nexus is still limited, leaving a big gap that needs further exploration This gap derives from a common perception that remittances mainly serve for consumption purposes, not for investment That is why this thesis would like to exploit this aspect The thesis seeks to find out the impact of remittances on investment in East and Southeast Asian developing countries There are some reasons for choosing these regions in the thesis Firstly, they are one of the largest recipients of international remittances among all developing regions in which some are in the top remittance-receiving After taking first difference ~INVi,t = ~siNVi,t-s + ~~dREMi,t + ~2·~Yi,t + ~vi,t (3a) Step 2: Considering the impact of remittances on investment inclusive of financial development INVi,t = Uo + LDsiNVi,t-s+ ~1REMi,t + Y1FDi,t + Y2REMi,t*FDi,t + ~2,Yi,t + J.li + Vi,t (2b) After taking first difference ~INVi,t = ~siNVi,t-s + ~1dREMi,t + Y1MDi,t + Y2dREMi,t*FDi,t + ~2·~Yi,t + ~Vi,t (3b) Step 3: Considering the impact of remittances on investment inclusive of financial development and institution quality INVi,t = Uo + LDsiNVi,t-s + ~1REMi,t + Y1FDi,t + Y2REMi,t*FDi,t + y3REMi,t*INSTi,t+ ~2·Yi,t + J.li + vi,t (2c) After taking first difference ~INVi,t = ~siNVi,t-s + ~1dR£Mi,t + Y1MDi,t + Y2dR£Mi,t*FDi,t + Y3~REMi,t*INSTi,t+ ~2·~Yi,t+ ~vi,t (3c) Where INVi,h INVi,t-s are investments at survey & previous periods; Yi,t is a set of control variables which are presented in variable description; REMi,t is the ratio of remittances to total output J.li is an unobserved country-specific fixed effect such as the state of technology, geography and the like; vi,t is the error term Assuming that the error term vit is not serially correlated and that the independent variables are weakly exogenous An important point should be paid attention that lots of literature gets around autocorrelation issue in models by averaging observations over 5-year periods (see for example: Giuliano and Ruiz-Arranz, 2006) It is explained that five years is thought to be long enough to eliminate business cycle effects, but short enough to capture important changes that occurs over time for a particular country However, that approach seems to be arbitrary and leads to excessive loss of information (Bjuggren et al., 2010) They propose the alternative by adding lagged dependent variables on the right hand side of the equation and regresses annual observations 29 · - Specifications in the thesis are run regression with annual observations in the spirit of Bjuggren et al., (20 10) In short, the chapter introduces research scope, data source as well as variables of interest employed in empirical models It also presents analytical steps, going from a simple model to advanced ones in order to clearly state the impact of remittances on domestic investment in cases of they go alone and of they are combined with channels including financial development and institution quality Furthermore, different empirical techniques are also described together with how to test significance of the employed methods Each method has pros and cons in which OLS is rather simple but encounters issues such as heteroskedasticity, unobserved country effect; FE may face autocorrelation and endogeneity GMM seems to be the most feasible solution to these problems 30 - CHAPTER IV: EMPRICAL RESULTS In this chapter, an overview of East and Southeast Asia is stated based on collected data, descriptive statistics as well as bivariate correlation between variables of interest in the appendix After all, empirical results are stated according to each empirical technique In each technique, data tables and analysis of each variable are once again presented separately into each step as stated in chapter III for convenient follow up With regard to the step 3, both financial development and institution are added in the model in which there are indicators proxied for the former and ones for the latter, so for simple presentation and saved space, regression-result-tables and analysis are presented in parts based on indicators of financial development Going along with estimated results, results of null hypothesis tests are also indicated 4.1 Descriptive statistics: 4.1.1 Remittances in East and Southeast Asia: Remittance inflows stand at average level of 2.55% and constitute large shares of GDP in some of the poor countries such as Philippines (13 72% ), Vietnam (8%) and Cambodia (4.1%) Meanwhile, these flows account for a small part in GDP in more relatively developed countries Typically, Hong Kong is the country receiving least this source at 0.07% of total output in term of remittances over GDP and standing right after Hong Kong is Korea with the figure of 0.1 % This indicates that remittances play an important role in less developed and developing countries as they contribute to lift up earnings of residents, reducing economic pressure, namely pressure on consumption This also partly shows outstanding characteristic of remittance inflows: altruism It means that these money sources are transferred by migrants to their home country in the aim to support their relative, especially in the context of poor economy or economic downturn That is why lots of research 31 sought the impact of remittances on poverty m these countries, especially Philippines (Yang, 2004) 4.1.2 Investment and economic growth in East and Southeast Asia: The representative level of investment over GDP for the regions is on average 27.3% over the period Yet, there is a considerable spread over the period from 1995 to 2008 For instance, the lowest share of investment over GDP belonged to Indonesia with 11.3 7% whereas China invests close to 45% of GDP, ranking first in the regions However, considering totally, Cambodia's investment share out of total output is modest compared to those of other economies but tends to increase As for Vietnam, this index gets increasingly higher over the period and reached the climax at 43.13% in 2007 Investment is the key motive to economic growth and that relationship is clearly reflected through growth rate in China and in the other countries in the regions China has relatively high and stable investment-GDP ratio and also achieves the highest economic growth at 14.2% in comparison to the other Noticeably, almost economies in East and Southeast regions, except for countries: China, Cambodia and Vietnam, saw a decrease in investment share out of GDP that led to negative economic growth in 1998 right after monetary crisis 1997 Thailand is the first country in which the crisis broken out had to suffer negative growth in two consecutive years 1997 and 1998 4.1.3 Financial development, openness and lending interest rate in East and Southeast Asia: Generally, Cambodia has the least developed financial system in term of measures of financial development Meanwhile, Hong Kong and Malaysia share first position corresponding to each measure For instance, Hong Kong leads in expansion of money supply (M2) over GDP with maximum level of 378% Malaysia is in the first position in two indicators of banking credit over GDP and private credit over GDP with 221.80% and 210.4% respectively Noticeably, Hong 32 - - Kong and Malaysia have largest openness compared to the other Financial openness is usually accompanied by trade openness It is hard to find out a country which executes a closed trade policy has an opened capital account This finding is consistent with McKinnon's view ( 1991) which suggests that trade openness is precondition for financial openness Lending interest rate stands at average value of 11% and strongly fluctuates as maximum value of 32.15% belongs to Indonesia and minimum of 5% belongs to Hong Kong Fluctuation in lending rate is largest in Indonesia over the period 19952008, yet this rate is usually maintained at high level in Cambodia Meanwhile, Hong Kong with developed financial system often grants stable and low lending rates 4.1.4 Institution quality in East and Southeast Asia: Institution quality is not identical but rather varied across economies m Generally, Hong Kong and Korea have better institution quality evidenced via a great deal of highly positive indicators Most impressively, Hong Kong leads in term of five indicators out of six, including control of corruption at 1.93, government effectiveness at 1.83, political stability at 1.1 0, regulatory quality at 1.99, rule of law at 1.57 Korea ranks first with the last indicator voice & accountability at 0.75 In contrast, Cambodia has the least developed institutions as all of indicators for institution quality are highly negative in which three ones reach minimum level, typically control of corruption at -1.20, government effectiveness at -1.27, rule of law at -1.21 Indonesia is rather unstable in term of polity as political stability stands at minimum -2.03 Opposite to Indonesia, politic situation in Vietnam is generally stable as politic index looks best out of indicators and is positive over the period Although China has gained positive achievements in many aspects, especially economic one; institution quality still exists shortcomings since almost all of institution-quality-indexes are negative and voice & accountability reaches the lowest level -1 72 33 4.2 Bivariate correlation of the variables of interest: 4.2.1 The relationship between remittances and variables of interest: As could be seen from the table in the appendix, remittances are almost negatively correlated with variables of interest except for lending rate and growth Although correlation index indicates positive between remittances and economic growth but it is less significant Negative correlation between investment and remittances implies that remittances not work as other capital flows which are associated with the search of investment opportunities with a final objective of profits Here remittance inflows are more likely to be money sources transferred to migrants' home country for insurance or altruistic purposes It is once again reflected via relationship between remittances and financial development since measures are negatively associated with remittances This can be explained that developed economies usually characterized by developed financial systems tend to receive fewer remittances The explanation is also the same for negative correlation between remittances and institution quality indicators 4.2.2 The relationship between investment and the other variables: Investment is positively & significantly correlated with the economic growth rate It is absolutely consistent with theory suggesting that investment is the key motive to economic growth Measures of financial development, typically bank credit and private credit are positively and significantly correlated with investment outlays This is subject to theory and previous literature suggesting that a good-functioned-financial system will reduce transaction costs, limit asymmetric information, better mobilize capital and channel these sources towards yield-generating activities and so on and hence consolidate investors' confidence and affect investment decision In summary, financial development has a big effect on investment outlays 34 Oppositely, lending rate is considered as a cost of investment An increase in lending rate means higher costs and causes bigger burdens for investors and then discourages motivations to invest The negative relationship between investment and lending rate is stated through corresponding correlation as expected Little surprisingly, openness is not positively but negatively correlated with investment Under standard economic theory starting from Ricardo to the neoclassical model is quite clear about the benefits of trade between nations based on comparative advantage and relative factor endowments (Hecksher-Ohlin) It is not, however, always true in the real world as not all countries carrying out trade openness gain benefits, increased investment and higher growth An explicit evidence is the phenomenon "Dutch desease" In a research conducted by Razin et al (2002), they show relationship between trade openness and investment instability They argue: "In the presence of lumpy investment cost of adjustment, globalization may have non-conventional effects on the level of investment and its cyclical behavior Trade openness may lead to a discrete 'jump' in the level of investment, as it may trigger a discrete change in the terms of trade Such a shift creates a sizeable boost in aggregate investment But trade openness may also lead to boom-bust cycles of investment (namely, multiple equilibrium) supported by self-validating expectations In this sense globalization destabilizes the economy There can be substantial gains from globalization in the investment-boom equilibrium However, gains could be small, or negative, in the investment-bust equilibrium." It implies that trade openness is not always accompanied by investment growth Sometime, it causes bad effects for the economy Relationship between investment and institution is rather mixed depending on each indicator Some cases are positive while the other is negative 35 4.2.3 The relationship between financial development and other variables: As for financial development, measures, especially bank credit & private credit are highly correlated This should not be sutprising since each of these indicators are supposed to be capturing the extent of financial development Besides, measures of financial development are also highly correlated with openness This is interpreted that trade openness and financial openness are usually accompanied together As mentioned above, trade openness is prerequisite for financial openness under the finding by McKinnon (1991) Also noticeably, financial development is highly correlated with institution quality indicators This relation is explained in the law and finance theory which suggests that cross-country differences in legal institution help explain crosscountry differences in financial development (La Porta et al., 1998) In the work "Legal Institutions and Financial Development" Beck and Levine (2003) once again scrutinize this theory and argue that savers in countries where legal systems enforce laws of private property right protection, investor protection, and support private contractual arrangements, are more willing to invest in firms; and hence financial markets flourish In contrast, financial development is expected to stunt in countries where legal institutions neither support private property rights nor facilitate private contracting Moreover, measures of financial development are negatively correlated with lending rate This can be interpreted based on imperfection of maket and role of financial intermediaries Usually, on underdeveloped-financial market, there is always existence of asymmetry There are people who have lots of productive investment opportunities, but are in shortage of capital Meanwhile, there are also other people who have abundant capital from saving resources but can not approach yield-generating investment opportunities Unfortunately, the people who save are frequently not the same people who have profitable investment opportunities available to them It creates an unbalance between demand & supply on the market Once such unbalance exists, cost of capital, here lending rate is representative, will 36 be pushed up highly Otherwise, a developed financial market limits such shortcomings through effective capital allocation Accordingly, cost of capital is maintained at acceptable level, more stable That is also one of the most important functions of financial intermediaries 4.3 Empirical Results: 4.3.1 Examining the impact of remittances on domestic investment using OLS estimation technique: 4.3.1.1 Step 1: The impact of remittances on investment would be examined without consideration of factors such as financial development and institution quality The regression result stated in the table below indicates that all of variables are statistically significant at 1% level The adjusted R-squared implies the model can explaine 34.44% fluctuation in dependant variable investment Now, the impact of each independant variable is in turn considered in more detail Table 2: OLS - REM Dependent variable: Investment (INV) REM -0.675595 (0.0004) 0.480749 GROW (0.0040) OPEN -0.035386 (0.0001) -0.642115 LEND (0.0000) 37.54316 Constant (0.0000) 117 Observations 0.344447 Adjusted R-square Note: p-values are m paratheses 37 Remittances: The regressiOn result shows that remittances are statistically significant but negatively correlated with investment An increase of 1% in remittances may cause a decrease of 0.67% in investment level with a condition that other variables are unchanged Remittances may be mainly spent on consumption purposes rather than yield-generating activities It can be inferred that remittance recipients substitute additional income generated from these inflows for labor income, causing negative effects on the rate of capital accumulation since labor and capital are complementary goods in production Growth: The positive coefficient of variable growth points out an increase of 1% in economic growth is associated with an increase of 0.48% in investment with a condition that remaining variables are constant The positive correlation between economic growth with investment is as expected and absolutely consistent with literatures suggesting that investment is the key channel to economic growth and development Openness: this variable is statistically significant but negatively correlated with investment If trade openness goes up by 1%, investment may drop down by 0.035% while other independent variables are kept unchanged This result indicates that trade liberalization is not always accompanied by higher investment as well as economic growth When economic development via export does not go along with stable development policies, the more the economy is opened, the larger fluctuation in economic activities becomes Lending interest rate: lending rate is highly statistically significant at 1% level and negatively associated with investment as expected The regression coefficient points out that investment may drop down by 0.64% if lending rate rises up by 1% while other variables are held constant This estimated result is consistent with theoretical and empirical literature holding that lending rate is deemed as cost of investment Conclusion: Remittance inflows have no positive impact in fostering investment at least in the direct way This result is different to the previous findings by Giuliano et al (2006) and Bjuggren et al (20 10) that find out the positive association 38 - - - - - - between remittances and investment Yet, it is in favor of points of views arguing remittances are not profit-driven but compensatory transfers and should be negatively associated with GDP growth Typically, the work by a staff group of IMF (2005) finds robust negative correlation between remittances and GDP growth This implies that remittances may not be intended to serve as a source of capital for economic development in general and for investment in particular 4.3.1.2 Step 2: The impact of remittances on investment continues to be examined with the presence financial development There are three measures of financial development, so there would be three equations corresponding each proxy When financial development is added in the model, explanation of fluctuation in dependent variable increase considerably, lying in a range of 54.47% and 67.13% compared to the level of 33.44% previously Almost all of variable are statistically significant at 5% except M2 and lending rate in some equations Table 3: OLS- REM- FD Variable REM GROW OPEN LEND FD REM*FD M2 BANCRE PRICRE -2.574 -2.094 -1.581 (0.0000) (0.0017) (0.0000) 0.488 0.813 0.796 (0.0004) (0.0000) (0.0000) -0.046 -0.041 -0.053 (0.0000) (0.0000) (0.0000) -0.496 -0.175 -0.085 (0.0000) (0.2656) (0.5235) 0.013 0.049 0.079 (0.2405) (0.0401) (0.0001) 0.040 0.028 0.033 (0.0000) (0.0033) (0.0000) 39 34.233 25.359 23.049 (0.0000) (0.0000) (0.0000) 117 116 116 0.571 0.544 0.671 Constant Observations Adjusted R-square Note: p-values are in paratheses Remittances: the regression coefficient is statistically significant at 2% level and negatively correlated with investment across specifications An increase in remittance inflows 1% is associated with an decrease in investment by a range of 1.58% to 2.57% Marginal effect of remittances on investment tends to decrease Remittances may be to the certain extent used for yield-generating purposes For instance, recipient households use unearned remittances to purchase land, house, jewelry or the alike to increase their wealth However, these activities may cause no effect on a country's overall economic activity if such assets acumulation take a form of being changed hands Growth: is absolutely statistically significant and positively correlated with investment An increase of 1% in economic growth could lead to an increase in investment with a spread of 49% to 81% in the condition that remaining variables are held unchanged Openness: coefficient of the variable openness is significantly but negatively associated with investment through out specifications It has the same sign with the above result in case of no financial development If trade openness goes up by 1% that may lead to a downturn in investment expenditure by from 0.041% to 0.05% in the context of other independent variables kept the same This effect is rather marginal, but it does point out an inference that trade liberalization is not always accompanied by higher investment and economic development Lending rate: across specifications, coefficient of lending rate Is negatively correlated with investment as expected, indicating the opposite impact when cost of investment gets higher An increase of 1% in lending rate may reduce investment expenditure by 0.08% to 0.49% Yet, it is just statisticaly significant in the 40 - specification of M2, but not in other specifications of bank credit and private credit It may be due to high correlation between lending rate and bank credit & private credit that makes coefficient of this variable less statistically significant Considered as cost in investment, lending rate also causes a decline in credit expansion when investment is discouraged Financial development: all of measures of financial development are positively associated with investment, meaning financial development plays a positive role in stimulating investment This IS consistent with literature as well as previuos findinds that suggest that a well-developed-financial system could limit shortcomings in a economy, then consolidate investors' confidence so that they can focus on business activities and hence investment is promoted further Out of proxies for financial development, M2 is less statistically significant, bank credit significant at 5% level and private credit are most significant at level of 1% Notably, private-credit-specification has largest marginal impact on investment as an increase of 1% in private credit is associated with a rise-up of 0.079% in investment with a condition that remaining independent variables are kept constant Meanwhile, levels of increasing in investment for bank credit and M2 are 0.049% and 0.013% respectively Tải FULL (97 trang): https://bit.ly/3cUtU87 Dự phòng: fb.com/TaiHo123doc.net Remittances & financial development: the interaction between remittances and financial development is statistically significant and positively affect investment A combination of remittances and financial development could encourage investment to go up by 0.028% to 0.04% dependent on each corresponding measure of financial development if this interaction rises up 1% and remaining variables are constant This result also implies that remittances and financial development have a complementary effect in boosting investment In other words, remittances have a positive impact on investment only if the domestic financial system is sufficiently sound It can easily explained by the fact that in an economy with developed financial system, remittances are mobilized more effectively and channeled towards profit-generating activities, and hence investment level is lifted up 41 Conclusion: By adding the factor financial development, fluctuation in dependant variable investment is much more explained Remittances not stimulate investment in direct way but when they are supported by financial development It can be said that financial development not only has an important effect on domestic investment but also plays a positively complementary role in remittance investment nexus This empirical result is different to those in the works of Bjuggren et a/ (20 10), of Bettin et a/ (2009) and Giuliano and Ruiz-Arranz (2006) that holds remittances are substitutionary to financial development in boosting investment and economic growth Yet, the finding supports the views of Mundaca (2005) and Bailliu (2000) suggesting a developed financial development potentially leads to better use of capital flows, typically remittances, and hence stimulate domestic investment and economic growth As expected and also consitent with literature and previous findings, economic growth has a positive correlation with investment while lending rate adversely impact investment Besides, openness is not positively correlated with investment, pointing out the fact that trade liberalization is not always associated with higher investment Tải FULL (97 trang): https://bit.ly/3cUtU87 Dự phòng: fb.com/TaiHo123doc.net 4.3.1.3 Step 3: Both financial development and institution quality are included in the model For shorter presentation, regression-result table will be stated in three separated parts according to three measures of financial development Hence, the effect of all indicators of institution quality is examined 4.3.1.3.a Regression result with the measure of financial development M2 Compared to the model with M2, measure of financial development, in step 2, adjusted R-squared in this model with institution quality is larger Its average value is approximately 0.60 instead of 57.18% above, indicating explanation in fluctuation of dependent variable is stronger when adding variable institution quality 42 · - -·-····· - Table 4: OLS - REM - FD (M2) - INST Variable CoCor GovEf PoSta ReQua Rulaw VoiAc REM -2.044 -2.737 -0.690 -2.479 -1.983 -1.986 (0.0000) (0.0000) (0.2157) (0.0000) (0.0000) (0.0000) 0.473 0.297 0.329 0.369 0.482 0.265 (0.0007) (0.0311) (0.0067) (0.0069) (0.0006) (0.0545) -0.045 -0.049 -0.061 -0.046 -0.046 -0.053 (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) -0.434 -0.618 -0.553 -0.518 -0.433 -0.579 (0.0004) (0.0000) (0.0000) (0.0000) (0.0003) (0.0000) 0.013 0.017 0.033 0.015 0.014 0.023 (0.2185) (0.1171) (0.0036) (0.1743) (0.1718) (0.0408) 0.041 0.042 0.021 0.039 0.038 0.028 (0.0000) (0.0000) (0.0024) (0.0000) (0.0000) (0.0005) 0.976 -1.026 1.001 -0.258 0.962 -0.592 (0.1225) (0.0809) (0.0001) (0.5968) (0.0881) (0.0259) 33.050 35.884 34.862 34.583 32.963 35.721 (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) 110 110 110 110 110 110 0.607 0.609 0.653 0.599 0.609 0.617 GROW OPEN LEND M2 REM*M2 REM*INST - Constant Observations Adjusted R-square Note: p-values are in paratheses Remittances: overall, estimated coefficients are highly statistically significant in almost all specifications except for case of political stability (PoSta) The negative coefficients tell us that remittance inflows are utilized for consumption purposes rather than profit-generating activities Growth: there is no change in relationship between economic growth and investment The estimated coefficients are statistically significant at 6% level and positively correlated with investment If economy grows up by 1%, investment will increase from 0.26% to 0.48% while remaining variables are held constant 43 6673980 ... Investment and economic growth in East and Southeast Asia 32 4.1.3 Financial development, openness and lending interest rate in East and Southeast Asia 32 4.1.4 Institution quality in East. .. this aspect The thesis seeks to find out the impact of remittances on investment in East and Southeast Asian developing countries There are some reasons for choosing these regions in the thesis Firstly,... founded in this thesis 1.2 Research objectives: The main objective of this thesis is to examine the impact of remittances on domestic investment in some developing countries in East and Southeast