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Foreign Aid, Political Power and FDI: Do Aid-dependent Institutions Facilitate Investment in Africa?

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  • Dongni Wang
  • Carmen Fillat-Castejón

Abstract

In this article, we examine the nexus between foreign development assistance and the attraction of foreign direct investment (FDI) through a de facto political power , as an aid-seeking and likely aid-dependent group. We apply structural equation modelling to investigate the direct and indirect effect of aid on FDI via economic institutions for a sample of 42 African countries from 2002 to 2016. Our results corroborate a direct positive effect of aid and institutions on FDI as a productive financial source. However, an aid-dependent de facto political power does not improve the economic institutions, and within a broad institutional context, it may even worsen them, evidencing the indirect effect of reducing a country’s attractiveness for FDI. This study offers robust evidence under different specifications and variables of institutions in addition to several controls for political and strategic interests and economic conditions. We ultimately develop a model explaining why aid barely makes any contribution to institutional reforms. In countries that are heavily dependent on aid, the beneficiary group is discouraged from improving institutional qualities as the source of benefits would be discontinued.

Suggested Citation

  • Dongni Wang & Carmen Fillat-Castejón, 2024. "Foreign Aid, Political Power and FDI: Do Aid-dependent Institutions Facilitate Investment in Africa?," Insight on Africa, , vol. 16(1), pages 46-72, January.
    • Handle: RePEc:sae:inafri:v:16:y:2024:i:1:p:46-72
    DOI: 10.1177/09750878231209921
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    References listed on IDEAS

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    1. Svensson, Jakob, 2000. "When is foreign aid policy credible? Aid dependence and conditionality," Journal of Development Economics, Elsevier, vol. 61(1), pages 61-84, February.
    2. Kimura, Hidemi & Todo, Yasuyuki, 2010. "Is Foreign Aid a Vanguard of Foreign Direct Investment? A Gravity-Equation Approach," World Development, Elsevier, vol. 38(4), pages 482-497, April.
    3. Ryan H. Murphy, 2016. "A Comment on "Measuring Economic Freedom: A Comparison of Two Major Sources"," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 31(Fall 2016), pages 69-91.
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