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

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

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.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 78 (2009)
Issue (Month): 2 (July)
Pages: 268-275

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Handle: RePEc:eee:inecon:v:78:y:2009:i:2:p:268-275
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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