How does migration affect investments in Georgia?

Migration can have various effects on the investment and financial sector.

On the one hand, remittances can be used by migrant households to invest in productive assets such as non-agricultural land and housing. Similarly, return migrants may accumulate capital and knowledge abroad and invest in business activities on their return. On the other hand, migration could have disruptive effects on investment if households need to sell their business or other valuable assets in order to finance the cost of migration. The net effect of migration and remittances on investments is therefore ambiguous. The analysis below examines separately how different aspects of migration affect investment outcomes linked to business ownership and productive assets.

Migration and remittances have limited effects on productive investments

The impact of migration and remittances on household investments in business activities has been widely discussed in the literature. Migration and remittances can offer a way to overcome credit market imperfections and enable households to invest in productive activities such as business start-ups and investments. Empirical studies on the topic provide mixed evidence, making it hard to draw any firm conclusions. One stream of literature found positive and significant impacts of remittances on business investments (Amuedo-Dorantes and Pozo, 2006; Massey and Parrado, 1998). The receipt of foreign earnings by households and communities seem to significantly increase the odds of business formation and productive investment in Mexico (Massey and Parrado, 1998). Similar results are found in the Dominican Republic: remittances increase the likelihood of family-run business investments (Amuedo-Dorantes and Pozo 2006). Another stream of literature finds limited associations between migration and productive investment (Basok, 2000; Zarate-Hoyos, 2004).

Given their large inflows to Georgia, remittances have the potential to stimulate savings, investments and financial sector development, and thereby contribute to better economic outcomes. However, previous empirical evidence from Georgia has shown that remittances are mainly spent on food and basic subsistence needs, housing, and to some extent on investments in child education. The link between migration, remittance and other types of investments, such as investments in business activities and land, is shown to be weaker or non-existent (Gerber and Torosyan, 2010; Gugushvili, 2013).

The IPPMD questionnaire contains a question about what activities households with migrants and remittances have carried out following the departure of a household member. The most common activity was repaying a loan, followed by paying for health treatment or household members' education and taking out a loan from a formal bank (Chapter 3). Few households stated that they used remittances for direct business investments or savings² (3% of rural households and less than 1% of urban households set up a business after an emigrant left the household; Chapter 3, Figure 3.6).

The IPPMD survey also collected data on business and real estate (land and housing) ownership. Overall business ownership among the households in the sample is very low. Only about 2% of the households in the sample run a business. One potential explanation for the low levels of business ownership in the data could be the way households interpret “business ownership”. The aim of the IPPMD data was to collect information about all types of business activities, formal and informal, including microenterprises and self-employment activities. However, the difference in reported self-employment activities (which are significantly higher, as shown in Chapter 4) and the data captured in the business module indicates that respondents may have been reluctant to include self-employment activities in the business module. The small sample size of households running a business limits the analysis related to migration and business ownership.

Remittances may also contribute to investments in the real estate sector. Qualitative evidence has found that remittances are accumulated to invest in real estate such as apartments in the capital (Zurabishvili, 2007). In the IPPMD sample, households receiving remittances are in general slightly more likely to possess both land and housing other than the house in which the household currently resides than households not receiving remittances, although the differences are small (Figure 7.4). The share of remittance-receiving households that own non-agricultural land is 22%, compared to 19% among household without remittances. The difference across the two household groups is even smaller when it comes to housing ownership (14% vs. 12%), and there is no visible difference in business ownership across households with and without remittances. The differences are not statistically significant.

Figure 7.4. Business and real estate ownership is higher among households receiving remittances than households not receiving remittances

Share of households owning a business and real estate, by remittance status

Note: Business ownership is defined as the household running at least one business. Real estate includes nonagricultural land and housing other than the property the household currently lives in. Results that are statistically significant (calculated using a chi-squared test) are indicated as follows: ***: 99%, **: 95%, *: 90%.

Source: Authors’ own work based on IPPMD data.

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The relationship between migration, remittances and productive investments is further investigated in Box 7.1. The estimations show no association between business ownership and emigration or remittances. When it comes to real estate, the results show a positive link between the amount of remittances received by the household and owning real estate in the form of either non-agricultural land or housing, while the probability of receiving remittances is not statistically significant. Having an emigrant in the household is negatively associated with business ownership, indicating that migration may have a disruptive effect on entrepreneurship.

Taken together, the findings show a relatively weak relationship between migration, remittances and productive investments. The amount of remittances is positively linked to real estate ownership, which indicates that remittances need to be relatively large to promote real estate investments. No link between remittances and business ownership was identified. This may in part be explained by the low sample size. Yet, Chapter 4 showed a positive link between remittances and self-employment for men in rural areas, which suggests that remittances in some cases can spur more informal self-employment activities - but does not seem to be linked to other business activities.