IDEAS home Printed from https://ideas.repec.org/p/eti/dpaper/07007.html
   My bibliography  Save this paper

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

Author

Listed:
  • KIMURA Hidemi
  • TODO Yasuyuki

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 distinguish among three effects of aid on FDI: a positive "infrastructure effect," a negative "rent-seeking effect," and a positive "vanguard effect," which is specific to the same source-recipient country pair of aid and FDI. According to our empirical analysis, foreign aid in general does not necessarily have an infrastructure, rent-seeking, or vanguard effect. However, we find robust evidence that foreign aid from Japan has a vanguard effect, while aid from other donor countries reveals no such effect. This vanguard effect seems to be peculiar to the Japanese foreign aid.

Suggested Citation

  • KIMURA Hidemi & TODO Yasuyuki, 2007. "Is Foreign Aid a Vanguard of FDI? A Gravity-Equation Approach," Discussion papers 07007, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:07007
    as

    Download full text from publisher

    File URL: https://www.rieti.go.jp/jp/publications/dp/07e007.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2003. "Instrumental variables and GMM: Estimation and testing," Stata Journal, StataCorp LP, vol. 3(1), pages 1-31, March.
    2. David L. Carr & James R. Markusen & Keith E. Maskus, 2001. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," American Economic Review, American Economic Association, vol. 91(3), pages 693-708, June.
    3. V N Balasubramanyam & V Mahambare, 2003. "Foreign direct investment in India," Working Papers 539987, Lancaster University Management School, Economics Department.
    4. Nicolas Péridy, 2004. "The new U.S. trans-ocean free trade initiatives: estimating export and FDI potentials from dynamic panel data models," Economics Bulletin, AccessEcon, vol. 6(9), pages 1-12.
    5. Philipp Harms & Matthias Lutz, 2003. "Aid, Governance, and Private Foreign Investment: Some Puzzling Findings and a Possible Explanation," Working Papers 03.04, Swiss National Bank, Study Center Gerzensee.
    6. Alesina, Alberto & Dollar, David, 2000. "Who Gives Foreign Aid to Whom and Why?," Journal of Economic Growth, Springer, vol. 5(1), pages 33-63, March.
    7. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
    8. Svensson, Jakob, 2000. "Foreign aid and rent-seeking," Journal of International Economics, Elsevier, vol. 51(2), pages 437-461, August.
    9. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February.
    10. Masahiro Kawai & Shinji Takagi, 2004. "Japan's official development assistance: recent issues and future directions," Journal of International Development, John Wiley & Sons, Ltd., vol. 16(2), pages 255-280.
    11. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
    12. Dollar, David & Easterly, William, 1999. "The Search for the Key: Aid, Investment and Policies in Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 8(4), pages 546-577, December.
    13. repec:spr:portec:v:1:y:2002:i:2:d:10.1007_s10258-002-0009-9 is not listed on IDEAS
    14. Raghuram G. Rajan & Arvind Subramanian, 2008. "Aid and Growth: What Does the Cross-Country Evidence Really Show?," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 643-665, November.
    15. Severine Blaise, 2005. "On the link between Japanese ODA and FDI in China: a microeconomic evaluation using conditional logit analysis," Post-Print hal-01295838, HAL.
    16. Philipp Harms & Matthias Lutz, 2006. "Aid, Governance and Private Foreign Investment: Some Puzzling Findings for the 1990s," Economic Journal, Royal Economic Society, vol. 116(513), pages 773-790, July.
    17. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
    18. Severine Blaise, 2005. "On the link between Japanese ODA and FDI in China: a microeconomic evaluation using conditional logit analysis," Applied Economics, Taylor & Francis Journals, vol. 37(1), pages 51-55.
    19. M. Ugur Karakaplan & Bilin Neyapti & Selin Sayek, 2005. "Aid and Foreign Direct Investment : International Evidence," Working Papers 0505, Department of Economics, Bilkent University.
    20. Assaf Razin & Ashoka Mody & Efraim Sadka, 2003. "The Role of Information in Driving FDI Flows; Host-Country Transparency and Source-Country Specialization," IMF Working Papers 03/148, International Monetary Fund.
    21. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
    22. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398, April.
    23. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2004. "On The Empirics of Foreign Aid and Growth," Economic Journal, Royal Economic Society, vol. 114(496), pages 191-216, June.
    24. David Roodman, 2006. "How to Do xtabond2," North American Stata Users' Group Meetings 2006 8, Stata Users Group.
    25. repec:ebl:ecbull:v:6:y:2004:i:9:p:1-12 is not listed on IDEAS
    26. Sourafel Girma, 2005. "Absorptive Capacity and Productivity Spillovers from FDI: A Threshold Regression Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(3), pages 281-306, June.
    27. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
    28. Niels Hermes & Robert Lensink, 2003. "Foreign direct investment, financial development and economic growth," Journal of Development Studies, Taylor & Francis Journals, vol. 40(1), pages 142-163.
    29. Stephen Bond, 2002. "Dynamic panel data models: a guide to microdata methods and practice," CeMMAP working papers CWP09/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    30. Beata Smarzynska Javorcik, 2004. "Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages," American Economic Review, American Economic Association, vol. 94(3), pages 605-627, June.
    31. David Roodman, 2007. "The Anarchy of Numbers: Aid, Development, and Cross-Country Empirics," World Bank Economic Review, World Bank Group, vol. 21(2), pages 255-277, May.
    32. Egger, Peter & Winner, Hannes, 2006. "How Corruption Influences Foreign Direct Investment: A Panel Data Study," Economic Development and Cultural Change, University of Chicago Press, vol. 54(2), pages 459-486, January.
    33. Peter Egger, 2005. "Alternative Techniques for Estimation of Cross-Section Gravity Models," Review of International Economics, Wiley Blackwell, vol. 13(5), pages 881-891, November.
    34. Li, Xiaoying & Liu, Xiaming, 2005. "Foreign Direct Investment and Economic Growth: An Increasingly Endogenous Relationship," World Development, Elsevier, vol. 33(3), pages 393-407, March.
    35. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
    36. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
    37. M. Ruth & K. Donaghy & P. Kirshen, 2006. "Introduction," Chapters,in: Regional Climate Change and Variability, chapter 1 Edward Elgar Publishing.
    38. Peter Egger, 2002. "An Econometric View on the Estimation of Gravity Models and the Calculation of Trade Potentials," The World Economy, Wiley Blackwell, vol. 25(2), pages 297-312, February.
    39. Todo, Yasuyuki & Miyamoto, Koji, 2006. "Knowledge Spillovers from Foreign Direct Investment and the Role of Local R&D Activities: Evidence from Indonesia," Economic Development and Cultural Change, University of Chicago Press, vol. 55(1), pages 173-200, October.
    40. William Easterly & Ross Levine & David Roodman, 2004. "Aid, Policies, and Growth: Comment," American Economic Review, American Economic Association, vol. 94(3), pages 774-780, June.
    41. Durham, J.B.J. Benson, 2004. "Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth," European Economic Review, Elsevier, vol. 48(2), pages 285-306, April.
    42. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
    43. Baier, Scott L. & Bergstrand, Jeffrey H., 2007. "Do free trade agreements actually increase members' international trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 72-95, March.
    44. Craig Burnside & David Dollar, 2004. "Aid, Policies, and Growth: Reply," American Economic Review, American Economic Association, vol. 94(3), pages 781-784, June.
    45. Xu, Bin, 2000. "Multinational enterprises, technology diffusion, and host country productivity growth," Journal of Development Economics, Elsevier, vol. 62(2), pages 477-493, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Asiedu, Elizabeth & Jin, Yi & Nandwa, Boaz, 2009. "Does foreign aid mitigate the adverse effect of expropriation risk on foreign direct investment?," Journal of International Economics, Elsevier, vol. 78(2), pages 268-275, July.
    2. Raza, Syed Ali & Sabir, Muhammad Sarwar & Mehboob, Farhan, 2011. "Capital inflows and economic growth in Pakistan," MPRA Paper 36790, University Library of Munich, Germany.
    3. Séverine Blaise, 2009. "Japanese Aid as a Prerequisite for FDI : The Case of Southeast Asian Countries," Finance Working Papers 22767, East Asian Bureau of Economic Research.
    4. Yasuyuki Sawada & Ayako Matsuda & Hidemi Kimura, 2012. "On The Role Of Technical Cooperation In International Technology Transfers," Journal of International Development, John Wiley & Sons, Ltd., vol. 24(3), pages 316-340, April.
    5. Kang, Sung Jin & Lee, Hongshik & Park, Bokyeong, 2011. "Does Korea follow Japan in foreign aid? Relationships between aid and foreign investment," Japan and the World Economy, Elsevier, vol. 23(1), pages 19-27, January.
    6. Simone Bertoli & Giovanni Andrea Cornia & Francesco Manaresi, 2007. "Aid performance and its determinants. A comparison of Italy with the OECD norm," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 60(242), pages 271-321.
    7. Simone Bertoli & Giovanni Andrea Cornia & Francesco Manaresi, 2007. "Aid performance and its determinants. A comparison of Italy with the OECD norm," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 60(242), pages 271-321.
    8. Carro, Martha & Larrú, José María, 2010. "Flowing Together or Flowing Apart: An Analysis of the Relation between FDI and ODA Flows to Argentina and Brazil," MPRA Paper 25064, University Library of Munich, Germany.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eti:dpaper:07007. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (KUMAGAI, Akiko). General contact details of provider: http://edirc.repec.org/data/rietijp.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.