In developing countries, weak institutional capacity to observe and regulate the economy discourages foreign capital inflows vital to venture investment. This informality effect may differ for migrant remittances, inflows less reliant on formal arrangements. We use institutional and transaction cost theories to propose that informality shifts migrant remittances toward venture funding. Analyses in 48 developing countries observed from 2001 to 2009 support our proposition. When the informal sector exceeds approximately 46% of GDP, remittances increase venture funding availability. Migrants and their remittances are vital to funding new businesses and entrepreneurially-led economic growth in developing countries where substantial informality deters other foreign investors.
Bibliographical noteFunding Information:
Please contact Paul M. Vaaler regarding this paper. This research benefitted from a presentation at the Instituto de Empresa, Madrid, Spain, Simon Fraser University's Beedie School of Business, Tufts University's Fletcher School of Law & Diplomacy, the University of Illinois at Urbana-Champaign's College of Business, and the meetings of the Great Lakes Entrepreneurship Network and the Strategic Management Society. Paul M. Vaaler acknowledges financial support for this research from the Carlson School of Management's Dean's Office. He also thanks Mari Sako and Chris Flegg of Oxford University's Saïd Business School, the late Mark Janes of Oxford University's Bodleian Library for time and resources helpful to the development of this research. He is also grateful to Sebastian Plubins, Iñigo Moré Martinez and colleagues at Ria Financial for helpful comments and survey information on recent remittance industry trends. All errors are ours.
© 2014 Elsevier Inc.
- Informal economy
- Venture funding availability