DO REMITTANCES ALLEVIATE CREDIT CONSTRAINTS FOR NEW FIRM CREATION: EVIDENCE FROM WORLD ENTERPRISE SURVEYS

Abstract

This paper investigates whether international migrant remittances alleviate formal credit constraints to facilitate new business creation, and how domestic financial development moderates this relationship. Utilizing comprehensive, cross-country, firm-level microdata from the World Bank Enterprise Surveys (WBES) paired with macroeconomic indicators across developing and emerging market economies, we employ a non-linear Probit framework alongside a Two-Stage Instrumental Variable Probit (IV-Probit) strategy to address potential endogeneity biases. Our empirical results reveal that access to cross-border remittance flows significantly increases the probability of formal entrepreneurial entry, acting as a crucial source of startup seed capital. Crucially, the interaction model uncovers a negative and statistically significant coefficient on the interaction term between remittance reliance and formal financial depth. This finding provides strong empirical support for the substitution hypothesis, demonstrating that the positive impact of remittances on formal firm creation is strongest in credit-starved environments with shallow banking systems. As domestic credit markets develop and formal loans become accessible, the marginal entrepreneurial reliance on informal remittance capital systematically diminishes. Our findings imply that for economies with weak financial infrastructure, policies should focus on lowering international money transfer fees and designing specialized diaspora investment instruments to effectively channel migrant capital into productive formal enterprises.