Building Businesses in the Old Country

Think of immigrants sending money to their home countries in the developing world and you might picture the cash being used for basic necessities: food, clothing, housing, and the like. However, new research by Carlson School Associate Professor Paul Vaaler found something surprising. Remittances support a much wider range of initiatives--and they make a more powerful impact than previously appreciated.

First of all, recent work shows that total remittances match or exceed government-to-government transfers. In addition, Vaaler explains, "A substantial and increasing amount of immigrant remittances go into funding new businesses. That's helping open up the economies of many developing countries, particularly in places such as Sub-Saharan Africa and Southeast Asia, where venture capital is tough to access."

Individual remittances are often modest, around $100 to $200 per month. And the projects they fund--small trucking firms, food stands, home-based businesses--can seem insignificant by U.S. standards. Taken cumulatively, however, they are helping drive economic growth and to build up public infrastructures--roles that have long been associated with foreign aid or direct government investment.

Vaaler's research uncovers another unexpected finding: Much of the funding flows from geographically concentrated groups of immigrants who also tend to lack formal educations. "That was surprising--one might assume that the money was coming from a more educated elite. These investments aren't a luxury, but rather a way for immigrants to support economic activity in their home countries--if we let it. Perhaps our biggest challenge is to figure out how not to get in the way and smother this activity with public policy."

His takeaway: On one hand, it's a basic human right for immigrants to remit money they earn, but it also offers tremendous potential to build economies and provide stability in parts of the world that desperately need it. Public policy should reflect this reality.

"Diaspora Concentration and the Venture Investment Impact of Remittances" Vaaler, P., Journal of International Management, (in press)

"Immigrant Remittances and the Venture Investment Environment of Developing Countries" Vaaler, P., Journal of International Business Studies, (2011)