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

  • Hidemi Kimura

    (Australia-Japan Research Centre)

  • 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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File URL: http://www.eaber.org/node/22881
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Paper provided by East Asian Bureau of Economic Research in its series Development Economics Working Papers with number 22881.

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Date of creation: Jan 2009
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Handle: RePEc:eab:develo:22881
Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
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