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Linking KfW-financed aid projects and FDI: Global evidence at the sub-national level

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Listed:
  • Wedemeyer, Laura
  • Kaplan, Lennart
  • Kluve, Jochen
  • Reiners, Lennart

Abstract

This study analyzes the empirical link between German bilateral development finance and Foreign Direct Investment (FDI) at the sub-national (ADM2) level. We construct a unique dataset by merging geo-referenced development aid projects - implemented by KfW Development Bank - over more than two decades with FDI project data. The analysis investigates four research hypotheses, and finds that: (i) development finance activity is positively and significantly associated with FDI inflows; (ii) the positive link is similarly pronounced in both hard and soft sectors; as well as (iii) irrespective of recipient countries' income level; and (iv) the positive aid-FDI association appears to be driven by projects with stronger implementation, as measured by higher ex-post evaluation ratings. For these higher-rated projects, KfW aid is significantly more likely to be associated with FDI from Germany and the EU. Our findings suggest that FDI may be an important channel through which development aid simultaneously benefits both recipient - by providing capital and technology - and donor countries, by signaling investment opportunities for its enterprises.

Suggested Citation

  • Wedemeyer, Laura & Kaplan, Lennart & Kluve, Jochen & Reiners, Lennart, 2026. "Linking KfW-financed aid projects and FDI: Global evidence at the sub-national level," University of Göttingen Working Papers in Economics 440, University of Goettingen, Department of Economics.
    • Handle: RePEc:zbw:cegedp:336810
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    References listed on IDEAS

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    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure

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