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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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    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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