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Does foreign aid mitigate the adverse effect of expropriation risk on foreign direct investment?

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  • Asiedu, Elizabeth
  • Jin, Yi
  • Nandwa, Boaz

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 expropriation leads to under-investment; (ii) the optimal level of FDI decreases as the risk of expropriation rises; and (iii) aid mitigates the adverse effect 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 find that risk has a negative effect on FDI and that aid mitigates but cannot eliminate the adverse effect of risk.

Suggested Citation

  • Asiedu, Elizabeth & Jin, Yi & Nandwa, Boaz, 2009. "Does foreign aid mitigate the adverse effect of expropriation risk on foreign direct investment?," Journal of International Economics, Elsevier, vol. 78(2), pages 268-275, July.
    • Handle: RePEc:eee:inecon:v:78:y:2009:i:2:p:268-275
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    Keywords

    Expropriation Foreign aid FDI Risk Sub-Saharan Africa;

    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, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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