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Foreign Aid, Foreign Direct Investment, and Domestic Investment Nexus in Landlocked Economies of Central Asia

  • Annageldy Arazmuradov

    ()

    (SDepartment of Economics and Management of Technology, University of Bergamo, Dalmine, Italy)

This paper investigates the relationship between foreign aid (ODA), foreign direct investment (FDI), and their effect on domestic investment in five landlocked and emerging economies of Central Asia - Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan - for the period 1992–2009. It is important for donor countries to understand whether or not their aid helps to bring in private capital essential in transition period. If it does, it creates a ground for public-private partnership that could restore conditions for economic growth in transition economies. If it does not, then it is necessary to reassess the mechanisms of aid architecture. As aggregate time series are expected to affect each other, we employ a multivariate system of seemingly unrelated regression (SUR) equations. We test the ODA-FDI link on two levels: regional and country. On the regional level, results indicate that (1) aid has a significant positive complementing effect on FDI inflows and (2) FDI complements domestic i vestment, while ODA decreases it. However, on a country level, foreign aid catalyzes FDI inflows only in Kyrgyzstan and Tajikistan. Our evidence suggests that the ODA-FDI nexus is present in countries with substantial aid inflows and dwindling economic performance.

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Article provided by Weissberg Publishing in its journal Economic Research Guardian.

Volume (Year): 2 (2012)
Issue (Month): 1 (May)
Pages: 129-151

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Handle: RePEc:wei:journl:v:2:y:2012:i:1:p:129-151
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