This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Does Foreign Aid Increase Foreign Direct Investment?

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Pablo Selaya (Department of Economics, University of Copenhagen)
Eva R. Sunesen (Department of Economics, University of Copenhagen)

Additional information is available for the following registered author(s):

Abstract

The notion that foreign aid and foreign direct investment (FDI) are complementary sources of capital is conventional among governments and internationalcooperation agencies. This paper argues that the notion is incomplete. Within the framework of an open economy Solow model we show that the theoretical relationship between foreign aid and FDI is indeterminate. Aid may raise the marginal productivity of capital by financing complementary inputs, such as public infrastructure projects and human capital investment. However, aid may also crowd out productive private investments if it comes in the shape of physical capital transfers. We therefore turn to an empirical analysis of the relationship between FDI and disaggregated aid flows. Our results strongly support the hypotheses that aid invested in complementary inputs draws in foreign capital while aid invested in physical capital crowds out FDI. The combined effect of these two types of aid is small but on average positive.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.econ.ku.dk/Research/Publications/pink/2008/0804.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 08-04.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 17 pages
Date of creation: Feb 2008
Date of revision:
Handle: RePEc:kud:kuiedp:0804

Contact details of provider:
Postal: Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark
Phone: (+45) 35 32 26 26
Fax: +45 35 32 30 00
Web page: http://www.econ.ku.dk
More information through EDIRC

Order Information:
Email:

For technical questions regarding this item, or to correct its listing, contact: (Henriette Aabo Hansen).

Related research
Keywords: foreign aid; foreign direct investment (FDI); open economy Solow model;

Other versions of this item:

Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F35 - International Economics - - International Finance - - - Foreign Aid
H40 - Public Economics - - Publicly Provided Goods - - - General
O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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. Reinikka, Ritva & Svensson, Jakob, 2002. "Coping with poor public capital," Journal of Development Economics, Elsevier, vol. 69(1), pages 51-69, October. [Downloadable!] (restricted)
  2. Santanu Chatterjee & Georgios Sakoulis & Stephen Turnovsky, 2000. "Unilateral Capital Transfers, Public Investment, and Economic Growth," Working Papers 0008, University of Washington, Department of Economics. [Downloadable!]
    Other versions:
  3. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 277-97, April. [Downloadable!] (restricted)
  4. C-J. Dalgaard & H. Hansen, 2001. "On Aid, Growth and Good Policies," The Journal of Development Studies, Taylor and Francis Journals, vol. 37(6), pages 17-41, August. [Downloadable!] (restricted)
  5. Christopher D. Carroll, 1998. "Why Do the Rich Save So Much?," NBER Working Papers 6549, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Turnovsky, S., 2000. "Growth in an Open Economy: some Recent Developments," Papers 5, Warwick - Development Economics Research Centre.
    Other versions:
  7. Christopher D. Carroll & Jody Overland & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, vol. 90(3), pages 341-355, June. [Downloadable!] (restricted)
    Other versions:
  8. Thiele, Rainer & Nunnenkamp, Peter & Dreher, Axel, 2006. "Sectoral aid priorities: Are donors really doing their best to achieve the millennium development goals?," Proceedings of the German Development Economics Conference, Berlin 2006 21, Verein für Socialpolitik, Research Committee Development Economics. [Downloadable!]
    Other versions:
  9. Santanu Chatterjee & Paola Giuliano & Ilker Kaya, 2007. "Where Has All the Money Gone? Foreign Aid and the Quest for Growth," IZA Discussion Papers 2858, Institute for the Study of Labor (IZA). [Downloadable!]
  10. Séverine Blaise, 2005. "On the link between Japanese ODA and FDI in China: a microeconomic evaluation using conditional logit analysis," Applied Economics, Taylor and Francis Journals, vol. 37(1), pages 51-55, January. [Downloadable!] (restricted)
  11. M. Uður Karakaplan & Bilin Neyaptý & Selin Sayek, 2005. "Aid and Foreign Direct Investment : International Evidence," Departmental Working Papers 0505, Bilkent University, Department of Economics. [Downloadable!]
    Other versions:
  12. 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)
  13. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
  14. 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)
    Other versions:
  15. Dollar, David & Easterly, William, 1999. "The search for the key : aid, investment, and policies in Africa," Policy Research Working Paper Series 2070, The World Bank. [Downloadable!]
    Other versions:
  16. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May. [Downloadable!] (restricted)
    Other versions:
  17. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April. [Downloadable!] (restricted)
  18. 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)
    Other versions:
  19. 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!]
  20. Norman Loayza & Klaus Schmidt-Hebbel & Luis Servén, 2000. "What Drives Private Saving Across the World?," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 165-181, May. [Downloadable!] (restricted)
    Other versions:
  21. Francesco Caselli, 2007. "The Marginal Product of Capital," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 535-568, 05. [Downloadable!] (restricted)
    Other versions:
  22. Odedokun, Matthew, 2003. "Analysis of Deviations and Delays in Aid Disbursements," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  23. Michael Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting Chickens When They Hatch: The Short-term Effect of Aid on Growth," Working Papers 44, Center for Global Development. [Downloadable!]
    Other versions:
Full references

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. Henri Bezuidenhout, 2009. "A Regional Perspective on Aid and FDI in Southern Africa," International Advances in Economic Research, Springer, vol. 15(3), pages 310-321, August. [Downloadable!] (restricted)
Statistics
Access and download statistics

Did you know? The most prolific authors have over 700 items listed on IDEAS.

This page was last updated on 2009-11-16.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.