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

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  • Harms, Philipp
  • Lutz, Matthias

Abstract

Does official 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 Hamburg Institute of International Economics (HWWA) in its series HWWA Discussion Papers with number 246.

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Date of creation: 2003
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Handle: RePEc:zbw:hwwadp:26128

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Keywords: Aid; Foreign Direct Investment; Institutions;

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  1. Alberto Alesina & David Dollar, 1998. "Who Gives Foreign Aid to Whom and Why?," NBER Working Papers 6612, National Bureau of Economic Research, Inc.
  2. Graham Bird & Dane Rowlands, 1997. "The Catalytic Effect of Lending by the International Financial Institutions," The World Economy, Wiley Blackwell, vol. 20(7), pages 967-991, November.
  3. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  4. Philipp Harms & Heinrich Ursprung, 2001. "Do Civil and Political Repression Really Boost Foreign Direct Investments?," CESifo Working Paper Series 421, CESifo Group Munich.
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  13. Lensink, Robert & White, Howard, 1999. "Are there negative returns to aid?," Research Report 99E60, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  14. Philipp Harms, 2002. "Political risk and equity investment in developing countries," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(6), pages 377-380.
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  17. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," William Davidson Institute Working Papers Series 63, William Davidson Institute at the University of Michigan.
  18. Feyzioglu, Tarhan & Swaroop, Vinaya & Zhu, Min, 1998. "A Panel Data Analysis of the Fungibility of Foreign Aid," World Bank Economic Review, World Bank Group, World Bank Group, vol. 12(1), pages 29-58, January.
  19. Stephen Knack, 2001. "Aid Dependence and the Quality of Governance: Cross-Country Empirical Tests," Southern Economic Journal, Southern Economic Association, vol. 68(2), pages 310-329, October.
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  24. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, Elsevier, vol. 40(2), pages 289-329, February.
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Citations

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Cited by:
  1. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2001. "On the Empirics of Foreign Aid and Growth," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 03-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Sep 2003.
  2. Kilby, Christopher, 2005. "World Bank lending and regulation," Economic Systems, Elsevier, vol. 29(4), pages 384-407, December.
  3. Philipp Harms & Michael Rauber, 2004. "Foreign aid and developing countries' creditworthiness," Working Papers 04.05, Swiss National Bank, Study Center Gerzensee.
  4. 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.
  5. Kilby, Christopher, 2005. "Aid and regulation," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 45(2-3), pages 325-345, May.
  6. KIMURA Hidemi & TODO Yasuyuki, 2007. "Is Foreign Aid a Vanguard of FDI? A Gravity-Equation Approach," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 07007, Research Institute of Economy, Trade and Industry (RIETI).

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