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Attracting foreign investment: Optimal ODA policy with trade liberalization


  • Ryusuke Ihara
  • Roki Iwahashi


This paper presents a theoretical framework for analyzing the efficient use of foreign aid (ODA) in attracting foreign direct investment, based on the variant of recent economic geography models. A salient result is that recipient countries with less trade openness should direct ODA towards social infrastructure, whereas it should be aimed toward developing economic infrastructure if the target country is a sufficiently open economy. The second result is that, in spite of optimal ODA policy, capital might outflow temporarily from less-developed countries at the beginning of trade liberalization. These results are consistent with empirical observations of 74 recipient countries for the time period 1991 - 2001.

Suggested Citation

  • Ryusuke Ihara & Roki Iwahashi, 2007. "Attracting foreign investment: Optimal ODA policy with trade liberalization," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 16(2), pages 193-211.
  • Handle: RePEc:taf:jitecd:v:16:y:2007:i:2:p:193-211
    DOI: 10.1080/09638190701325524

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    Cited by:

    1. Carro, Martha & Larrú, José María, 2010. "Flowing Together or Flowing Apart: An Analysis of the Relation between FDI and ODA Flows to Argentina and Brazil," MPRA Paper 25064, University Library of Munich, Germany.


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