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Does Foreign Aid Increase Foreign Direct Investment?

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  • Selaya, Pablo
  • Sunesen, Eva Rytter

Abstract

We examine the idea that aid and foreign direct investment (FDI) are complementary sources of foreign capital. We argue that the relationship between aid and FDI is theoretically ambiguous: aid raises the marginal productivity of capital when used to finance complementary inputs (like public infrastructure and human capital investments), but aid may crowd out private investments when it comes in the shape of pure physical capital transfers. Empirically, we find that aid invested in complementary inputs draws in FDI, while aid invested in physical capital crowds it out. The paper shows that the composition of aid matters for its overall level of efficiency.

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Bibliographic Info

Article provided by Elsevier in its journal World Development.

Volume (Year): 40 (2012)
Issue (Month): 11 ()
Pages: 2155-2176

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Handle: RePEc:eee:wdevel:v:40:y:2012:i:11:p:2155-2176

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Web page: http://www.elsevier.com/locate/worlddev

Related research

Keywords: development aid; foreign direct investment (FDI); foreign capital for development; aid effectiveness;

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References

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  1. Rainer Thiele & Peter Nunnenkamp & Axel Dreher, 2006. "Sectoral Aid Priorities: Are Donors Really Doing their Best to Achieve the Millennium Development Goals?," KOF Working papers 06-124, KOF Swiss Economic Institute, ETH Zurich.
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Citations

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Cited by:
  1. Henri Bezuidenhout, 2009. "A regional perspective on Aid and FDI in Southern Africa," Working Papers 147, Economic Research Southern Africa.
  2. Carro, Martha & Larrú, José María, 2010. "Flowing Together or Flowing Apart: An Analysis of the Relation between FDI and ODA Flows to Argentina and Brazil," MPRA Paper 25064, University Library of Munich, Germany.
  3. Andreas Fuchs & Axel Dreher & Peter Nunnenkamp, 2012. "Determinants of Donor Generosity: A Survey of the Aid Budget Literature," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 121, Courant Research Centre PEG.
  4. Julian Donaubauer & Birgit Meyer & Peter Nunnenkamp, 2014. "Aid, Infrastructure, and FDI: Assessing the Transmission Channel with a New Index of Infrastructure," Kiel Working Papers 1954, Kiel Institute for the World Economy.
  5. Katarína Čulková & Katarína Teplická, 2013. "Contribution Of Foreign Direct Investment For The Region Development," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 19-27, February.
  6. T. Bhavan & Changsheng Xu & Chunping Zhong, 2011. "Growth effect of foreign aid and volatility in South Asia," International Journal of Development Issues, Emerald Group Publishing, Emerald Group Publishing, vol. 10(3), pages 204-213, September.
  7. Kang, Sung Jin & Lee, Hongshik & Park, Bokyeong, 2011. "Does Korea follow Japan in foreign aid? Relationships between aid and foreign investment," Japan and the World Economy, Elsevier, Elsevier, vol. 23(1), pages 19-27, January.

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