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Aid, Governance, and Private Foreign Investment: Some Puzzling Findings and a Possible Explanation

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  • Philipp Harms

    ()
    (Study Center Gerzensee and University of Konstanz)

  • Matthias Lutz

    ()
    (University of St. Gallen)

Abstract

Does offcial aid pave the road for private foreign investment or does it suffocate private initiative by diverting resources towards unproductive activities? In this paper we explore this question using data for a large number of developing and emerging economies. Controlling for countries’ institutional environment, we find that, evaluated at the mean, the marginal effect of aid on private foreign investment is close to zero. Surprisingly, however, the effect is strictly positive for countries in which private agents face a substantial regulatory burden. After testing the robustness of this result, we offer a theoretical model that is able to rationalize our puzzling observation.

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Bibliographic Info

Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 03.04.

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Length: 39 pages
Date of creation: Jun 2003
Date of revision:
Handle: RePEc:szg:worpap:0304

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References

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  1. Philipp Harms & Heinrich W. Ursprung, 2002. "Do Civil and Political Repression Really Boost Foreign Direct Investments?," Economic Inquiry, Western Economic Association International, vol. 40(4), pages 651-663, October.
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  26. Philipp Harms, 2002. "Political risk and equity investment in developing countries," Applied Economics Letters, Taylor & Francis Journals, vol. 9(6), pages 377-380.
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Citations

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Cited by:
  1. Philipp Harms & Michael Rauber, 2004. "Foreign aid and developing countries' creditworthiness," Working Papers 04.05, Swiss National Bank, Study Center Gerzensee.
  2. Philipp Harms & Matthias Lutz, 2004. "The Macroeconomic Effects of Foreign Aid: A Survey," University of St. Gallen Department of Economics working paper series 2004 2004-11, Department of Economics, University of St. Gallen.
  3. 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.
  4. 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).
  5. Kilby, Christopher, 2004. "Aid and Regulation," Vassar College Department of Economics Working Paper Series 65, Vassar College Department of Economics.
  6. Kilby, Christopher, 2005. "World Bank lending and regulation," Economic Systems, Elsevier, vol. 29(4), pages 384-407, December.

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