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

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  • Hidemi Kimura

    (Australia-Japan Research Centre)

  • Yasuyuki Todo

Abstract

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.

Suggested Citation

  • Hidemi Kimura & Yasuyuki Todo, 2009. "Is Foreign Aid a Vanguard of Foreign Direct Investment? A Gravity-Equation Approach," Development Economics Working Papers 22881, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:develo:22881
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    1. John Anyanwu, 2013. "Working Paper 181 - Determining the Correlates of Poverty for Inclusive Growth in Africa," Working Paper Series 979, African Development Bank.
    2. Barthel, Fabian & Neumayer, Eric & Nunnenkamp, Peter & Selaya, Pablo, 2014. "Competition for Export Markets and the Allocation of Foreign Aid: The Role of Spatial Dependence among Donor Countries," World Development, Elsevier, vol. 64(C), pages 350-365.
    3. Kripfganz, Sebastian & Schwarz, Claudia, 2013. "Estimation of Linear Dynamic Panel Data Models with Time-Invariant Regressors," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79756, Verein für Socialpolitik / German Economic Association.
    4. Debasish Kumar Das & Champa Bati Dutta, 2013. "Global Financial Crisis And Foreign Development Assistance Shocks In Least Developing Countries," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 1-41, June.
    5. Donaubauer, Julian & Meyer, Birgit & Nunnenkamp, Peter, 2016. "Aid, Infrastructure, and FDI: Assessing the Transmission Channel with a New Index of Infrastructure," World Development, Elsevier, vol. 78(C), pages 230-245.
    6. repec:wsi:serxxx:v:59:y:2014:i:05:n:s021759081450043x is not listed on IDEAS
    7. John C. Anyanwu, 2012. "Why Does Foreign Direct Investment Go Where It Goes?: New Evidence From African Countries," Annals of Economics and Finance, Society for AEF, pages 425-462.
    8. Julian Donaubauer, 2014. "Does foreign aid really attract foreign investors? New evidence from panel cointegration," Applied Economics Letters, Taylor & Francis Journals, pages 1094-1098.
    9. Ramin Dadasov & Philipp Harms & Oliver Lorz, 2013. "Financial integration in autocracies: Greasing the wheel or more to steal?," Economics of Governance, Springer, vol. 14(1), pages 1-22, February.
    10. Kafayat Amusa, Nara Monkam, Nicola Viegi, 2016. "Foreign aid and Foreign direct investment in Sub-Saharan Africa: A panel data analysis," Working Papers 612, Economic Research Southern Africa.
    11. Annageldy Arazmuradov, 2012. "Foreign Aid, Foreign Direct Investment, and Domestic Investment Nexus in Landlocked Economies of Central Asia," Economic Research Guardian, Weissberg Publishing, vol. 2(1), pages 129-151, May.
    12. Anwar, Sajid & Nguyen, Lan Phi, 2011. "Foreign direct investment and trade: The case of Vietnam," Research in International Business and Finance, Elsevier, pages 39-52.
    13. Lien, Donald & Oh, Chang Hoon & Selmier, W. Travis, 2012. "Confucius institute effects on China's trade and FDI: Isn't it delightful when folks afar study Hanyu?," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 147-155.
    14. Mottaleb Khondoker & Kaliappa Kalirajan, 2012. "Determinants of Labor-intensive exports by the Developing Countries : A Cross Country Analysis," EABER Working Papers 23304, East Asian Bureau of Economic Research.
    15. Donaubauer, Julian & Herzer, Dierk & Nunnenkamp, Peter, 2012. "Does aid for education attract foreign investors? An empirical analysis for Latin America," Kiel Working Papers 1806, Kiel Institute for the World Economy (IfW).
    16. Brun, Jean-François & Gnangnon, Sèna Kimm, 2017. "Does trade openness contribute to driving financing flows for development?," WTO Staff Working Papers ERSD-2017-06, World Trade Organization (WTO), Economic Research and Statistics Division.
    17. T.Bhavan, 2014. "Effectiveness of Foreign Aid in Facilitating Foreign Direct Investment: Evidence from Four South Asian Countries," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(12), pages 1770-1783, December.
    18. Röttgers, Dirk & Grote, Ulrike, 2014. "Africa and the Clean Development Mechanism: What Determines Project Investments?," World Development, Elsevier, vol. 62(C), pages 201-212.
    19. Kalinowski, Thomas, 2013. "Crisis management and the varieties of capitalism: Fiscal stimulus packages and the transformation of East Asian state-led capitalism since 2008," Discussion Papers, Project Group Modes of Economic Governance SP III 2013-501, Social Science Research Center Berlin (WZB).
    20. Uchenna EFOBI & Simplice ASONGU & Ibukun BEECROFT, 2015. "Foreign Direct Investment, Aid and Terrorism: Empirical Insight Conditioned on Corruption Control," Working Papers 15/007, African Governance and Development Institute..
    21. Khondoker Abdul Mottaleb & Kaliappa Kalirajan, 2010. "Determinants of Foreign Direct Investment in Developing Countries: A Comparative Analysis," ASARC Working Papers 2010-13, The Australian National University, Australia South Asia Research Centre.
    22. Uchenna EFOBI & Ibukun BEECROFT & Simplice ASONGU, 2014. "Foreign Aid and Corruption: Clarifying Murky Empirical Conclusions," Working Papers 14/025, African Governance and Development Institute..
    23. Khondoker Abdul Mottaleb & Kaliappa P. Kalirajan, 2014. "Determinants Of Labor-Intensive Exports By The Developing Countries: A Cross Country Analysis," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 59(05), pages 1-22.
    24. T. Bhavan & Changsheng Xu & Chunping Zhong, 2011. "Growth effect of foreign aid and volatility in South Asia," International Journal of Development Issues, Emerald Group Publishing, vol. 10(3), pages 204-213, September.
    25. Uchenna EFOBI & Ibukun BEECROFT & Simplice ASONGU, 2014. "Foreign Aid and Corruption: Clarifying Murky Empirical Conclusions," Working Papers 14/025, African Governance and Development Institute..

    More about this item

    Keywords

    foreign aid; foreign direct investment; gravity equation;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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