Abstract

Despite the increasing importance of remittances in total international capital flows, the relationship between remittances and stock of capital formation has not been adequately studied. This paper studies one of the links between remittances and fixed capital formation, in particular how local financial sector development influences a country’s capacity to take advantage of remittances. Using time series data for the period 1977-2010, the study employed the ADF and Philip-Perron modified unit root tests and based its analysis on a Dynamic Ordinary Least Squares- two–stage Instrumental Variable [2SIV] approach to control for the endogeneity problem that arises from utilization of lag independent variables. We find that remittances boost stock of physical investment in Nigeria countries with positive relationship with developed financial systems by providing complementarities to finance investment in a developed financial system. Substantial government allocation on social services is equally important in accelerating capital formation. The findings of this study strongly suggest that for Nigeria to benefit from international transfers, Nigeria financial sector should be fine-tuned to complement remittances potential capital formation.

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