Remittance receipt and business ownership in the Dominican Republic

This study examines the links between remittance receipt and business ownership in the Dominican Republic. Recognising their likely joint determination, we estimate a system of simultaneous probit models examining the likelihood of both events. In this manner, we are able to identify some of the determinants of both household outcomes: remittance receipt and business ownership. While it has been suggested that workers' remittances may loosen capital constraints faced by households in developing economies with regards to business ownership, our findings do not support this hypothesis in the case of the Dominican Republic. Specifically, household remittance receipt appears to be associated with a lower household likelihood of business ownership. Why does remittance receipt reduce the household's likelihood of business ownership? One possibility is that remittances increase the reservation wage of household heads and, as such, they are associated with a reduced likelihood of household business ownership. Alternatively, remittances may be used to fulfil basic consumption needs, contribute to the housing stock, increase the availability of healthcare for individuals, or contribute to the education of household members. Although remittance receipt does not appear to enhance the household's likelihood of business ownership, business owners seem more likely to receive international remittances. A number of explanations exist for this observation. The existence of a family business may signal to the emigrant the availability of good investment opportunities in the home community. This may serve as a motivation to remit. Alternatively, emigrants may send money home in order to claim household assets upon their return home; that is, remittances may respond to a bequest motive. Overall, our findings point to a seemingly complex relationship between remittances and business ownership. In particular, it appears as if the view of remittances as a determinant of business investment may simply stem from the positive correlation between remittances and business ownership owing to the fact that business assets attract emittances. If this is the case, accounting for the endogeneity of remittances becomes essential when assessing their role in promoting business entrepreneurship. Moreover, while the periodic remittance payments sent by emigrants may not promote business investments, the lump sums taken back by migrants upon their return home - another form of remittances not considered in this study - may still have an impact on business entrepreneurship based on their larger size and the accompanying human capital acquired by the migrant while abroad. This is an additional and, potentially, important channel by which migration may stimulate business investments worth exploring in future studies. © 2006 The Authors Journal compilation 2006 Blackwell Publishing Ltd.