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Part of larger project focusing on the policies that sending countries use to “harness”their diaspora-Both their human and financial capital
This paper focuses on the role of migrant networks in facilitating cross-border investment
Other papers look at migrants and aid, remittances and trade
Puzzle: Policy-makers/countries compete for global capital
How do policy-makers signal their credible commitment to a secure investment environment?
Standard answer: institutions
But: Information is asymmetric and costly
Investors may not know about opportunities, rules, regulatory environment, business practices, culture, customs, etc.
Migrant networks (migrants from country iresiding in country j) decrease these asymmetries
Provides signal about home country
Migrant as entrepreneur
◦ First mover advantage in the case of destination specific knowledge
Migrant as entrepreneur
– Maintain ties to home country through investment
– Altruistic or profit motive
– “First mover” advantage due to destination specific knowledge
Caveat: this link assumes a high level of education on the part of the migrant.
Caveat: not all information is about “good” opportunities.
Importance of migrant-based information– Migrants should be able to provide “private”
information– Absent investors/portfolio managers divulging their
information sources, this is difficult to test
Private/specific information should be more valuable when comparing heterogeneous to homogeneous investment opportunities
FDI is more heterogeneous than portfolio
◦ Riskier and more varied
Standard “gravity” setup:– Transactionij = size of i * size of j - distance
between ij
Gravity models have been “augmented” to include measures of “familiarity”
– Common colonial origin
– Common language
– Distance
Investmentij = f(Migrant Stockji + Domestic Institutionsi + International Institutionsij + Gravity type controlsij)
Gravity based controls:– gdpi x gdpj, distance, common colonial heritage,
common official language
Other controls: – Correlation of historical growth rates, controls on
capital market securitiesi, common currency peg, dual taxation treaty, human capitali
– Bilateral trade (additional measure of familiarity)
58 (27) source countries (j); 120 (116) destination countries (i)
Source, destination and source & destination dummies
Does investment follow migrants (does investment and immigration go in the same direction)?
Selection
Strategy 2: Instrumental variables. Difficult because it is difficult to find
variables associated with bilateral migration that are uncorrelated with bilateral investment
Solution: earlier work (Leblang, Fitzgerald & Teets) finds that citizenship policy matters for migration◦ jus solis v jus sanguinis for investing country◦ highly unlikely that this is related to investment
behavior other than through migration and we know that it does significantly effect migration.
Cross-border investment ◦ portfolio: stocks and bonds issued by
corporate/government entities
◦ fdi: ownership either joint or greenfield
FDI is more heterogeneous◦ riskier in terms of expropriation
◦ opportunities are almost infinite
Migrant-based information should be more important for FDI
Estimation via seemingly unrelated regression; 95% confidence
interval are based on bootstrap resampling (500 reps)
Results also indicate that migrants networks provide private/specific information-something not captured by measures of common language, colony, trade, distance, etc
Given the global competition for capital, how can home countries “harness” their diasporas?– Hometown associations– Diaspora conventions – External political rights: provisions for dual
citizenship and voting rights for expatriates
Do these connections help home countries attract investment?
Focus on expatriate voting rights ◦ Increasing in recent years albeit in different forms
Migrants have significant effects on both their host and their home countries.
Findings provide a rationale for findings connecting institutions to investment.
Provides a parallel to “brain drain” but in reverse.
Speaks to increasing importance of expatriate communities in influencing domestic politics.
