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Is Foreign Aid a Vanguard of FDI? A Gravity-Equation Approach

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Author Info
KIMURA Hidemi
TODO Yasuyuki

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Abstract

This paper investigates whether and how foreign aid facilitates foreign direct investment (FDI) flows into less developed countries. We employ a large data set of source-recipient country pairs and conduct gravity equation-type estimation. Our empirical methodology enables us to distinguish among three effects of aid on FDI: a positive "infrastructure effect," a negative "rent-seeking effect," and a positive "vanguard effect," which is specific to the same source-recipient country pair of aid and FDI. According to our empirical analysis, foreign aid in general does not necessarily have an infrastructure, rent-seeking, or vanguard effect. However, we find robust evidence that foreign aid from Japan has a vanguard effect, while aid from other donor countries reveals no such effect. This vanguard effect seems to be peculiar to the Japanese foreign aid.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 07007.

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Length: 35 pages
Date of creation: Mar 2007
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Handle: RePEc:eti:dpaper:07007

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Simone Bertoli & Giovanni Andrea Cornia & Francesco Manaresi, 2008. "Aid Effort and Its Determinants: A Comparison of the Italian Performance with other OECD Donors," Working Papers Series wp2008_11.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze Economiche. [Downloadable!]
  2. Pablo Selaya & Eva R. Sunesen, 2008. "Does Foreign Aid Increase Foreign Direct Investment?," Discussion Papers 08-04, University of Copenhagen. Department of Economics. [Downloadable!]
  3. Elizabeth Asiedu & Yi Jin & Boaz Nandwa, 2009. "Does Foreign Aid Mitigate the Adverse Effect of Expropriation Risk on Foreign Direct Investment?," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200905, University of Kansas, Department of Economics. [Downloadable!]
  4. SAWADA Yasuyuki & MATSUDA Ayako & KIMURA Hidemi, 2007. "On the Role of Technical Cooperation in International Technology Transfers," Discussion papers 07045, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
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