Remittance inflows and starting a business
| Date | 06 November 2017 |
| Published date | 06 November 2017 |
| Pages | 290-314 |
| DOI | https://doi.org/10.1108/JEPP-D-17-00002 |
| Author | Durga Prasad Gautam |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Remittance inflows and starting
a business
Durga Prasad Gautam
Department of Social Sciences, St Joseph’s College, Patchogue, New York, USA
Abstract
Purpose –Political economy research recognizes that the inflows of external financial resources help the
governments enact market-oriented reforms. Since remittances have outpaced other types of financial inflows
in many countries, they can potentially increase the government’s incentive to implement regulatory reform
that can contribute to business-friendly environment. This issue has long been overlooked by the literature on
remittances. The purpose of this paper is to examine whether remittances promote business regulatory
reform in the recipient countries.
Design/methodology/approach –This study uses balance of payments data on remittances for
114 countries during 2004-2012 period. Since remittances could be endogenous to business regulation, the
identification strategy follows an instrumental variable approach. The author assesses the general stability of
linear model estimates by fitting the beta regression model.
Findings –The resultsshow that, while the increase inremittance inflows is associatedwith lower regulatory
requirements for starting a business in the recipient economy, this association is stronger in developing
countries than in high-income nations.Various sensitivity tests reinforcethe robustness of these findings.
Originality/value –One of the most important yet overlooked aspects of remittances is that they can
potentially shape the political will to enact regulatory reform for businesses. The incentives for the
government to relax burdensome entry regulations tend to stem from potential gains associated with
the formalization of remittances. This paper makes a first attempt at studying the link between remittances
and the quality of entry regulation.
Keywords Entrepreneurship, Remittances, Formalization, Regulatory reform, Starting a business
Paper type Research paper
1. Introduction
The global economy has witnessed a substantial growth in international remittance flows
since the early 2000s. The estimatedvalue of global remittances has increased nearly six-fold
from $100 billionin 2000 to $592 billion in 2014 (Ratha et al.,2016). As a result of the sustained
increase in outward migration, remittances have emerged as one of the largest sources of
financial inflows to many developing countries. Due to persistency in migrants’desire to
remit, as seen during and in the aftermath of the global financial crisis, remittances
have become more resilient than other types of financial flows to these countries
(World Bank, 2011). A large body of research on remittances has documented their robust
effects on investment in physical and human capital (Lucas, 1987; Durand, Parrado and
Massey, 1996; Yang, 2005), small business and entrepreneurship (Massey and Parrado, 1994;
Dustmann and Kirchkamp, 2002; McCormick and Wahba, 2004;Woodruff and Zenteno, 2007;
Vaaler, 2011), and financial development (Giuliano and Ruiz-Arranz, 2009; Gupta et al., 2009;
Aggarwal et al., 2011; Chowdhury, 2011; Demirguc-Kunt et al., 2011).
From the standpoint of entrepreneurship development, two questions surrounding
remittances arise which are of broader economic interest for the recipient country: can these
external resource inflows serve as a financial stimulus for domestic entrepreneurs? and if so,
how such stimulus shapes the political will to enact business regulatory reform? Some
embedded but less visible characteristics such as the regulatory system, bureaucratic
efficiency, and the nature of business governance play a critical role in fostering domestic
entrepreneurship (Doing Business, 2016). Improving the regulatory environment for
Journal of Entrepreneurship and
Public Policy
Vol. 6 No. 3, 2017
pp. 290-314
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-D-17-00002
Received 25 April 2017
Revised 8 July 2017
Accepted 9 July 2017
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
The author would like to thank Dr Feng Yao, Dr Stratford Douglas, Dr Arabinda Basistha, and two
anonymous referees for their valuable comments and suggestions.
290
JEPP
6,3
business can make a difference in part because it mitigates the risks for entrepreneurs, new
and experienced alike. The countries with lower barriers to entry generally see higher
formal sector participation and a greater entry rate of new businesses (Klapper et al., 2006;
Ciccone and Papaioannou, 2007; Kaplan et al., 2011).
Political economy research has recognized that the inflow of external financial resources
can help reforms get launched and sustained by alleviating the costs of reform; and the
policymakers who have courageously pursued market-oriented reforms are considered as
heroes of the economics profession (see Harberger, 1993; Rodrik, 1996; Male sky, 2008). When
more businesses enter the formal sector, the government tax base broadens, yielding additional
revenues,thereby enablingthe government to further strengthen the policyreforms. Moreover,
the increase in the number of registered businesses is associated with greater competition,
more job creation, and higher economic growth (Djankov et al., 2002; Klapper et al., 2006).
Some recent studies assert that the inflow of overseas workers’remittances tends to
increase government’s incentive to implement institutional reform and provide
opportunities for revenue enhancement (see Gamlen, 2006; Diedhiou, 2011; Vaaler, 2011).
Although remittances are not taxed directly, their presence expands the base for other taxes,
such as the VAT (Abdih et al., 2012), and moreover, the financial inclusion of a large section
of remittance-receiving households is likely to contribute to building a broader formal
economy (see Anzoategui et al., 2014). Even temporary remittance inflows have some
tendency to produce an expansionary effect for the economy as a whole; thereby leading to a
decline in the share of the informal sector (Chatterjee and Turnovsky, 2016). One key
implication of these findings is that the large-scale transfer of private foreign resources,
i.e., remittances, to the formal sector of the recipient economy is likely to prompt strategic
changes in the regulatory aspects of business and entrepreneurship. In this paper, we first
present the real-world scenarios and some case studies to underline the increasing role of
remittances in motivating the recipient-country government for business-friendly reforms,
and then empirically examine whether remittance inflows help improve the regulatory
environment governing the entry of new businesses in the recipient country.
The likelihood that the inflow of remittances can affect the government’s incentive to
enact business regulatory reform has been increasingly visible in recent years. For instance,
Figure 1 displays the time series plots of remittances per capita and the quality of
entry regulation of start-up firms for a sample of large remittance-receiving countries.
These countries appear to exhibit a positive relationship between remittance inflows and the
quality of regulation governing the entry of new businesses.
Given the potential role of remittances in promoting business regulatory reforms, it is worth
examining how remittance-receiving households allocate the funds they receive in remittances.
Although the results of empirical research on the uses of remittances are quite varied and
seemingly contradictory, the literature has identified two most basic expenditure patterns of the
recipient households: a substantial amount of remittances is used to buy consumer goods and
services, land and houses (Stahl and Arnold, 1986; Durand, Kandel, Parrado and Massey, 1996;
Brown, 1997; Adams, 1998; Acosta et al., 2009); and a nontrivial proportion of remittance inflows
has been channeled into business investment (Massey and Parrado, 1994; Durand, Parrado and
Massey, 1996; Dustmann and Kirchkamp, 2002; McCormick and Wahba, 2004; Yang, 2005;
Woodruff and Zenteno, 2007).
While researchers emphasize that expenditures on housing, land and even jewelry
constitute saving and investment, the effects of such saving on overall economy should be
considered carefully. When existing houses and land change hands, this is not itself a
productive activity. It is only when new capital goods such as equipment are purchased and
put into service, the aggregate capital stock or its productivity is actually enhanced
(Chami et al., 2003). Remittance inflows to the recipient country as a whole, regardless of
how these funds are used and what payoff such usage provides to the individuals, are likely
291
Remittance
inflows and
starting a
business
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