Does aid matter for FDI in ECOWAS: Investigating the infrastructure channel

This paper investigates whether and how aid targeted at specific sub‐categories of economic infrastructure could assist the economies of 14 Economic Community of West African States to attract higher foreign direct investment (FDI) inflow via improvement in infrastructure in water supply and sanitation, energy, transport and ICT. By relying on the three stage least squares estimation technique that is able to account for endogeneity among structural equations, and utilizing data spanning 2005–2018, we found quite interesting results. First, aid targeted at infrastructure indicates a strong positive effect on the countries’ infrastructure endowment. Second, there is robust evidence that aid promotes FDI, but not necessarily through the infrastructure channel. Targeted aid appears to exert a positive and direct knock‐on effect on FDI—apparently, because investors anticipate the positive effect that targeted aid is almost always inclined to produce on host countries’ infrastructure endowment. Finally, aid allocation by Development Assistance Committee donors seems to have been primarily merit‐based, followed by weaker evidence for “need”. The study recommends, inter alia, more need‐based aid allocation, particularly in economies where initial infrastructure endowment is minimal.