Despite the voluminous literature on the effect of Aid for Trade (AfT) flows on recipient countries' trade performance, little is known about the relationship between AfT flows and other capital flows to developing countries. This paper contributes to the literature by exploring the effect of AfT inflows on investment-oriented remittances inflows, notably through the channel of trade costs. Using an unbalanced panel dataset of 106 countries over the period 2002–2019, and the two-step system generalized method of moments, the empirical analysis has established several outcomes. AfT flows exert a positive effect on investment-oriented remittances flows, with the magnitude of this positive effect being higher in Least developed countries than in other countries, and in remittance-dependent countries. AfT flows stimulate investment-oriented remittances flows in countries that face higher trade costs. Finally, total AfT flows reduce investment-oriented remittances flows in countries that experience a higher volatility of the overall trade costs, but boost investment-oriented remittances in countries that improve the quality of trade measures. The analysis shows that AfT flows could be an important leverage for stimulating investment-oriented remittances flows, and promote the development of the private sector in beneficiary countries.
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