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Does Foreign Aid Mitigate the Adverse Effect of Expropriation Risk on Foreign Direct Investment?

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  • Elizabeth Asiedu

    (Department of Economics, The University of Kansas)

  • Yi Jin

    (Department of Economics, University of Kansas)

  • Boaz Nandwa

    (Economic Growth Center, Yale University)

Abstract

We construct a model of FDI, risk and aid, where a country loses access to FDI and aid if the country expropriates FDI. We show that: (i) The threat of expropri- ation leads to under-investment; (ii) The optimal level of FDI decreases as the risk of expropriation rises; and (iii) Under certain conditions, aid mitigates the adverse e¤ect of expropriation risk on FDI. The empirical analysis employs data for 35 low- income countries and 28 countries in Sub-Saharan Africa, over the period 1983-2004. We ?nd that risk has a negative e¤ect on FDI, aid mitigates the adverse effect of risk on FDI, and that bilateral and multilateral aid are roughly equivalent at achieving these results. We also provide an estimate of the level of aid that would eliminate expropriation risk, and ?nd that for low-income countries, the amount of aid would need to at least double in order for aid to completely offset the effect of risk.

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Bibliographic Info

Paper provided by University of Kansas, Department of Economics in its series WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS with number 200905.

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Length: 38 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:kan:wpaper:200905

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Keywords: Expropriation; Foreign Aid; FDI; Risk; Sub-Saharan Africa.;

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Citations

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Cited by:
  1. Martin Gassebner & Pierre-Guillaume Méon, 2010. "Where do Creditor Rights Matter? Creditor Rights, Political Constraints, and Cross-Border M&A Activity," Working Papers CEB 10-019.RS, ULB -- Universite Libre de Bruxelles.
  2. Elizabeth Asiedu & Yi Jin & Isaac Kalonda-Kanyama, 2012. "The Impact of HIV/AIDS on Foreign Direct Investment: Evidence from Sub-Saharan Africa," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201207, University of Kansas, Department of Economics.
  3. Asiedu, Elizabeth & Nanivazo, Malokele & Nkusu, Mwanza, 2013. "Determinants of foreign aid in family planning: How relevant is the Mexico City Policy?," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  4. Asiedu, Elizabeth & Lien, Donald, 2011. "Democracy, foreign direct investment and natural resources," Journal of International Economics, Elsevier, vol. 84(1), pages 99-111, May.
  5. Luis Carvalho & Aurora A.C. Teixeira, 2011. "Where are the poor in International Economics?," FEP Working Papers 425, Universidade do Porto, Faculdade de Economia do Porto.
  6. Arazmuradov, Annageldy, 2011. "Foreign aid, foreign direct investment and domestic investment nexus in landlocked economies of Central Asia," MPRA Paper 36881, University Library of Munich, Germany, revised 23 Feb 2012.
  7. Pierre-Guillaume Méon & Khalid Sekkat, 2012. "FDI Waves, Waves of Neglect of Political Risk," ULB Institutional Repository 2013/132815, ULB -- Universite Libre de Bruxelles.
  8. Alexandra Tabova, 2013. "Portfolio diversification and the cross-sectional distribution of foreign investment," International Finance Discussion Papers 1091, Board of Governors of the Federal Reserve System (U.S.).
  9. Jana Brandt & Markus Jorra, 2012. "Aid Withdrawal as Punishment for Defaulting Sovereigns? An Empirical Analysis," MAGKS Papers on Economics 201220, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  10. 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, vol. 10(3), pages 204-213, September.
  11. Sanjo, Yasuo, 2012. "Country risk, country size, and tax competition for foreign direct investment," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 292-301.
  12. Julian Donaubauer & Dierk Herzer & Peter Nunnenkamp, 2012. "Does Aid for Education Attract Foreign Investors? An Empirical Analysis for Latin America," Kiel Working Papers 1806, Kiel Institute for the World Economy.
  13. Kamel ABDELLAH ( GREThA, CNRS, UMR 5113 & ISG, UNIVERSITE DE TUNIS) & Dalila NICET-CHENAF (GREThA, CNRS, UMR 5113) & Eric ROUGIER (GREThA, CNRS, UMR 5113), 2012. "FDI and macroeconomic volatility: A close-up on the source countries," Cahiers du GREThA 2012-21, Groupe de Recherche en Economie Théorique et Appliquée.
  14. Farla, Kristine & de Crombrugghe, Denis & Verspagen, Bart, 2013. "Institutions, Foreign Direct Investment, and Domestic Investment: crowding out or crowding in?," MERIT Working Papers 054, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).

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