Remittances, FDI and aid: which flow matters most for developing economies?

Foreign direct investment gets the summits, the incentive packages and the ribbon-cuttings. But for developing economies as a group it is no longer the largest external flow. In 2024, low- and middle-income economies received $654 bn in personal remittances from workers abroad, compared with $464 bn of net FDI inflows — about 1.4 times as much.

The crossover

The crossover is recent: remittances have been the larger flow only since 2023 (2 years). Across the 35 years since 1990, remittances were the larger flow in 4. FDI into the group is also concentrated: Brazil, Egypt and Mexico alone received 36% of the group's FDI in 2024. Since 2000, remittances have grown about nine times in current dollars, against three times for FDI. Official development assistance — aid — is the smallest of the three for the group as a whole: $252 bn in 2023, compared with $599 bn of remittances and $408 bn of FDI.

Steadier money

Remittances are also far more stable. Since 2000, net FDI into low- and middle-income economies has moved by an average of 18% a year (up or down); remittances by 10%. The pandemic was a stress test: between 2019 and 2020, FDI into the group fell 1.2%, while remittances rose 0.5% — far more resilient than the steep decline many early forecasts expected. Migrants tend to send more when families at home face hardship, which makes remittances partly counter-cyclical.

That does not make remittances a substitute for FDI. They mostly finance household consumption, housing and education, while FDI brings capital equipment, technology, management know-how and links to global markets — the spillovers investment promotion agencies hope for. The two do different jobs.

The poorest economies still rely on aid

The picture changes at the bottom of the income scale. In 2023, low-income economies received $44.6 bn in net aid, $12.2 bn in remittances and $17.2 bn in FDI. Aid was the largest of the three — about three times the FDI figure. For lower-middle-income economies, by contrast, remittances were about three times the size of FDI in 2024.

Where remittances matter most

Relative to the size of the economy, remittances can be enormous. In 2024, they were equivalent to 47% of GDP in Tajikistan. Across 103 low- and middle-income economies with data for 2024, remittances exceeded FDI in 62.

Why this matters for investment policy

• FDI is not the only game. For many developing economies, lowering the cost of sending remittances or channelling diaspora savings into investment may matter as much as attracting multinationals.
• Diaspora investors are a bridge. Emigrant communities are often early foreign investors in their home economies — a group investment promotion agencies can target directly.
• Volatility has costs. Economies that rely on FDI for external financing need buffers for the years it falls away; remittances and aid behave differently over the cycle.