International Migration and Foreign Direct Investment in a Macro-Dynamic Model of Two Small Open Economies

Many developing countries in need of foreign capital for development have implemented policies to attract foreign direct investment. At the same time, these countries attracted by the foreign currency earnings brought back by migrant workers in the form of remittances are promoting overseas migrant work. I employ a macro-dynamic model of two small open economies, an advanced economy and a developing country, to examine the interaction between international migration and foreign direct investment vis-à-vis economic development. The model extends the work in the literature to incorporate three important features: (i) the positive externality of remittances on the borrowing constraint of the developing country (ii) an international capital ow in the form of foreign direct investment with a cross-border mobility friction and (iii) a developing country that is characterized by a two-sector dependent economy. Extensive numerical simulations provide important implications for the macroeconomic impact of the policy of poor countries to encourage migration and the policy to promote foreign direct investment