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Is Foreign Aid a Vanguard of Foreign Direct Investment? A Gravity-Equation Approach

  • Hidemi Kimura
  • Yasuyuki Todo

This paper investigates whether and how foreign aid facilitates foreign direct investment (FDI) flows into less developed countries. We employ a large data set of source-recipient country pairs and conduct gravity equation-type estimation. Our empirical methodology enables us to examine an effect through which aid from a donor country promotes FDI from the same donor in particular, which we call a ‘vanguard effect.’ We find that foreign aid in general does not have any significant effect on FDI. However, when we allow for differences in the size of aid effects across donor countries, we find robust evidence that foreign aid from Japan in particular has a vanguard effect, that is, Japanese aid promotes FDI from Japan but does not attract FDI from other countries.

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Paper provided by Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University in its series Asia Pacific Economic Papers with number 380.

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Length: 38 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:csg:ajrcau:380
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