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

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Author Info
Elizabeth Asiedu (Department of Economics, The University of Kansas)
Yi Jin (Department of Economics, University of Kansas)
Boaz Nandwa (Economic Growth Center, Yale University)

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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 e¤ect 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 o¤set the e¤ect of risk.

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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
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Handle: RePEc:kan:wpaper:200905

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

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Find related papers by JEL classification:
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
F35 - International Economics - - International Finance - - - Foreign Aid
I20 - Health, Education, and Welfare - - Education - - - General
O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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  1. Asiedu, Elizabeth & Villamil, Anne P., 2002. "Imperfect Enforcement, Foreign Investment, And Foreign Aid," Macroeconomic Dynamics, Cambridge University Press, vol. 6(04), pages 476-495, September. [Downloadable!]
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    Other versions:
  3. Philipp Harms & Matthias Lutz, 2006. "Aid, Governance and Private Foreign Investment: Some Puzzling Findings for the 1990s," Economic Journal, Royal Economic Society, vol. 116(513), pages 773-790, 07. [Downloadable!] (restricted)
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  6. Svensson, Jakob, 2000. "Foreign aid and rent-seeking," Journal of International Economics, Elsevier, vol. 51(2), pages 437-461, August. [Downloadable!] (restricted)
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  8. Ugur Karakaplan & Bilin Neyapti & Selin Sayek, 2005. "Aid and Foreign Direct Investment: International Evidence," Working Papers 2005/12, Turkish Economic Association. [Downloadable!]
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  9. Maizels, Alfred & Nissanke, Machiko K., 1984. "Motivations for aid to developing countries," World Development, Elsevier, vol. 12(9), pages 879-900, September. [Downloadable!] (restricted)
  10. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July. [Downloadable!] (restricted)
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  12. Elizabeth Asiedu & Boaz Nandwa, 2007. "On the Impact of Foreign Aid in Education on Growth: How Relevant is the Heterogeneity of Aid Flows and the Heterogeneity of Aid Recipients?," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200701, University of Kansas, Department of Economics. [Downloadable!]
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  13. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August. [Downloadable!] (restricted)
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  14. Asiedu, Elizabeth & Nandwa, Boaz, 2007. "The Impact of Foreign Aid in Education Growth: How Relevant is the Heterogeneity of Aid Flows and the Heterogeneity of Aid Recipients," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  15. Kobrin, Stephen J., 1980. "Foreign enterprise and forced divestment in LDCs," International Organization, Cambridge University Press, vol. 34(01), pages 65-88, December. [Downloadable!]
  16. Asiedu, Elizabeth & Villamil, Anne P., 2000. "Discount Factors And Thresholds: Foreign Investment When Enforcement Is Imperfect," Macroeconomic Dynamics, Cambridge University Press, vol. 4(01), pages 1-21, March. [Downloadable!]
  17. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2004. "On The Empirics of Foreign Aid and Growth," Economic Journal, Royal Economic Society, vol. 114(496), pages F191-F216, 06. [Downloadable!] (restricted)
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  18. KIMURA Hidemi & TODO Yasuyuki, 2007. "Is Foreign Aid a Vanguard of FDI? A Gravity-Equation Approach," Discussion papers 07007, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  19. Jonathan Eaton & Mark Gersovitz, 1984. "A Theory of Expropriation and Deviations From Perfect Capital Mobility," NBER Working Papers 0972, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  20. Alesina, Alberto & Dollar, David, 2000. " Who Gives Foreign Aid to Whom and Why?," Journal of Economic Growth, Springer, vol. 5(1), pages 33-63, March. [Downloadable!] (restricted)
    Other versions:
  21. Rodrik, Dani, 1995. "Why is there Multilateral Lending?," CEPR Discussion Papers 1207, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
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