Remittances Versus Foreign Direct Investment: a Comparative Analysis of the Impact on Economic Growth in Remittance-Dependent Countries (2005–2024)

Abstract

This article analyzes the comparative impact of remittances and foreign direct investment (FDI) on economic growth in economies highly dependent on external financial inflows. Although both FDI and remittances contribute to development, they operate through distinct mechanisms: remittances primarily enhance household consumption and welfare, while foreign direct investment stimulates productive capacity, innovation, and structural transformation. The study aims to determine whether these financial flows act as substitutes or complements in promoting sustainable growth and how their effects differ across developing economies. The research focuses on the evolution of ten countries with a high remittance to GDP ratio over the period 2005–2024, using World Bank data: Tajikistan, Lebanon, Samoa, Nepal, Gambia, Nicaragua, Honduras, Lesotho, El Salvador, and Haiti. These countries were selected based on the most recent World Bank data on the share of remittances in gross domestic product for the year 2024. To identify the determinants of GDP growth, econometric estimations were performed using three distinct models: Pooled Ordinary Least Squares, Fixed Effects and Random Effects. The dependent variable was GDP growth rate, while the explanatory variables included remittances, foreign direct investment, exports, final consumption expenditure and gross capital formation, each expressed as a proportion of GDP, along with the logarithm of the exchange rate. Interpolation was used to address missing data and the exchange rate variable was log transformed to facilitate coefficient interpretation. Diagnostic tests, including the Breusch–Pagan and Hausman tests, identified the random effects model as the most appropriate specification, combining consistency and efficiency. The results indicate that foreign direct investment, final consumption expenditure, and gross capital formation have significant positive effects on economic growth, while remittances exert a positive but less stable influence. These findings suggest that remittances support short term stability, whereas foreign direct investment promotes long term productivity and transformation. The study concludes that both financial flows are complementary and, when supported by coherent policies, can reinforce each other to foster inclusive and sustainable growth in remittance dependent economies. UDC: [336.717.1+339.727.22]:330.354; JEL: F21, F24, O47, C33