IDEAS home Printed from https://ideas.repec.org/p/zbw/cegedp/336810.html

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

Author

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
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/336810/1/1961113384.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Salvador Gil-Pareja & Rafael-Llorca Vivero & Jordi Paniagua, 2013. "The effect of the great recession on foreign direct investment: global empirical evidence with a gravity approach," Applied Economics Letters, Taylor & Francis Journals, vol. 20(13), pages 1244-1248, September.
    2. Dreher, Axel & Lang, Valentin & Reinsberg, Bernhard, 2024. "Aid effectiveness and donor motives," World Development, Elsevier, vol. 176(C).
    3. Louise Ashton & Jed Friedman & Diana Goldemberg & Mustafa Zakir Hussain & Thomas Kenyon & Akib Khan & Mo Zhou, 2023. "A Puzzle with Missing Pieces: Explaining the Effectiveness of World Bank Development Projects," The World Bank Research Observer, World Bank, vol. 38(1), pages 115-146.
    4. Jian Li & Alan Paisey, 2007. "Foreign Direct Investments and Enterprises," Palgrave Macmillan Books, in: Transfer Pricing Audits in China, chapter 1, pages 3-17, Palgrave Macmillan.
    5. 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.
    6. Hristos Doucouliagos & Martin Paldam, 2009. "The Aid Effectiveness Literature: The Sad Results Of 40 Years Of Research," Journal of Economic Surveys, Wiley Blackwell, vol. 23(3), pages 433-461, July.
    7. Axel Dreher & Sarah Langlotz, 2020. "Aid and growth: New evidence using an excludable instrument," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 53(3), pages 1162-1198, August.
    8. Isaksson, Ann-Sofie & Kotsadam, Andreas, 2018. "Chinese aid and local corruption," Journal of Public Economics, Elsevier, vol. 159(C), pages 146-159.
    9. Séverine Blaise, 2005. "On the link between Japanese ODA and FDI in China: a microeconomic evaluation using conditional logit analysis [Sur le lien entre l'aide et les IDE japonais en Chine : une évaluation microéconomique utilisant une analyse en logit conditionnel]," Post-Print hal-02379966, HAL.
    10. Liao, Hongwei & Chi, Yedi & Zhang, Jiarui, 2020. "Impact of international development aid on FDI along the Belt and Road," China Economic Review, Elsevier, vol. 61(C).
    11. Selaya, Pablo & Sunesen, Eva Rytter, 2012. "Does Foreign Aid Increase Foreign Direct Investment?," World Development, Elsevier, vol. 40(11), pages 2155-2176.
    12. Heidland, Tobias & Michael, Maximilian & Schularick, Moritz & Thiele, Rainer, 2025. "Identifying mutual interests: How donor countries benefit from foreign aid," Kiel Working Papers 2291, Kiel Institute for the World Economy.
    13. Gibogwe, Vincent & Nigo, Ayine R.S. & Kufuor, Karen, 2022. "Foreign direct investment and economic growth in Tanzania," MPRA Paper 115028, University Library of Munich, Germany, revised 20 Oct 2022.
    14. Li, Jing & Rugman, Alan M., 2007. "Real options and the theory of foreign direct investment," International Business Review, Elsevier, vol. 16(6), pages 687-712, December.
    15. Sebastian Galiani & Stephen Knack & Lixin Colin Xu & Ben Zou, 2017. "The effect of aid on growth: evidence from a Quasi-experiment," Journal of Economic Growth, Springer, vol. 22(1), pages 1-33, March.
    16. Beata S. Javorcik, 2015. "Does FDI Bring Good Jobs to Host Countries?," The World Bank Research Observer, World Bank, vol. 30(1), pages 74-94.
    17. Lee, Hyun-Hoon & Ries, John, 2016. "Aid for Trade and Greenfield Investment," World Development, Elsevier, vol. 84(C), pages 206-218.
    18. Amdam, Rolv Petter & Benito, Gabriel R.G., 2022. "Temporality and the first foreign direct investment," Journal of World Business, Elsevier, vol. 57(5).
    19. Michael A. Clemens & Steven Radelet & Rikhil R. Bhavnani & Samuel Bazzi, 2012. "Counting Chickens when they Hatch: Timing and the Effects of Aid on Growth," Economic Journal, Royal Economic Society, vol. 122(561), pages 590-617, June.
    20. Sebastian Krautheim, 2013. "Export-supporting FDI," Canadian Journal of Economics, Canadian Economics Association, vol. 46(4), pages 1571-1605, November.
    21. Vernon Henderson & Adam Storeygard & David N. Weil, 2011. "A Bright Idea for Measuring Economic Growth," American Economic Review, American Economic Association, vol. 101(3), pages 194-199, May.
    22. 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.
    23. Basu, Parantap & Guariglia, Alessandra, 2007. "Foreign Direct Investment, inequality, and growth," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 824-839, December.
    24. Henrik Hansen & John Rand, 2006. "On the Causal Links Between FDI and Growth in Developing Countries," The World Economy, Wiley Blackwell, vol. 29(1), pages 21-41, January.
    25. Girod, Desha M. & Tobin, Jennifer L., 2016. "Take the Money and Run: The Determinants of Compliance with Aid Agreements," International Organization, Cambridge University Press, vol. 70(1), pages 209-239, January.
    26. Yi-Hui Chiang & Yiming Li & Chih-Young Hung, 2007. "A Dynamic Growth Model for Flows of Foreign Direct Investment," DEGIT Conference Papers c012_047, DEGIT, Dynamics, Economic Growth, and International Trade.
    27. ., 2007. "Foreign Direct Investment in Korea: Theoretical Considerations," Chapters, in: The Korean Economy, chapter 2, pages 20-33, Edward Elgar Publishing.
    28. Abebe, Girum & McMillan, Margaret & Serafinelli, Michel, 2022. "Foreign direct investment and knowledge diffusion in poor locations," Journal of Development Economics, Elsevier, vol. 158(C).
    29. Sebastian Krautheim, 2013. "Export‐supporting FDI," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 46(4), pages 1571-1605, November.
    30. Kimura, Hidemi & Todo, Yasuyuki, 2010. "Is Foreign Aid a Vanguard of Foreign Direct Investment? A Gravity-Equation Approach," World Development, Elsevier, vol. 38(4), pages 482-497, April.
    31. Peter Nunnenkamp & Hannes Öhler & Maximiliano Sosa Andrés, 2017. "Need, Merit and Politics in Multilateral Aid Allocation: A District†level Analysis of World Bank Projects in India," Review of Development Economics, Wiley Blackwell, vol. 21(1), pages 126-156, February.
    32. Vani Archana & N. C. Nayak & P. Basu, 2007. "Foreign Direct Investment in India: Emerging Horizon," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 42(2), pages 225-266, July.
    33. Garriga, Ana Carolina & Phillips, Brian John, 2014. "Foreign Aid as a Signal to Investors: Predicting FDI in Post-Conflict Countries," MPRA Paper 88643, University Library of Munich, Germany.
    34. Junyan Tian, 2025. "Does Aid Induce Foreign Direct Investment: Updated Evidence from a Quasi-Experiment," The World Bank Economic Review, World Bank, vol. 39(2), pages 260-280.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Dreher, Axel, 2025. "When aid misses the target: competing objectives, new classifications, and smarter delivery," World Development, Elsevier, vol. 196(C).
    3. Hüseyin Şen & Ayşe Kaya, 2026. "Does a revenue-neutral shift from indirect to direct taxes reduce inequality? Evidence from high-income OECD countries," Empirical Economics, Springer, vol. 70(2), pages 1-48, February.
    4. Dreher, Axel & Lang, Valentin & Reinsberg, Bernhard, 2024. "Aid effectiveness and donor motives," World Development, Elsevier, vol. 176(C).
    5. Silvio Traverso & Guido Bonatti, 2015. "Education and FDI: An Insight from US Outflows," Journal of Social Economics, Research Academy of Social Sciences, vol. 2(3), pages 101-116.
    6. Mirko Heinzel & Bernhard Reinsberg & Giuseppe Zaccaria, 2025. "Core funding and the performance of international organizations: Evidence from UNDP projects," Regulation & Governance, John Wiley & Sons, vol. 19(3), pages 957-976, July.
    7. Liu, Ailan & Wang, Zhixuan & Zhu, Pengcheng, 2021. "Does informal economy undermine the effects of China’s aid on its outward foreign direct investment?," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 315-329.
    8. Sèna Kimm Gnangnon & Michael Roberts, 2017. "Aid for Trade, Foreign Direct Investment and Export Upgrading in Recipient Countries," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 8(02), pages 1-36, June.
    9. Sèna Kimm Gnangnon, 2022. "Aid for Trade, export product diversification, and foreign direct investment," Review of Development Economics, Wiley Blackwell, vol. 26(1), pages 534-561, February.
    10. Narayan Sethi & Purna Chandra Padhan & Devi Prasad Dash, 2024. "When Is Aid Credible in the Emerging Asian economies? An Empirical Re-assessment from the Perspective of Economic Growth," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 7331-7357, June.
    11. Liao, Hongwei & Chi, Yedi & Zhang, Jiarui, 2020. "Impact of international development aid on FDI along the Belt and Road," China Economic Review, Elsevier, vol. 61(C).
    12. Heinzel, Mirko & Reinsberg, Bernhard, 2024. "Trust funds and the sub-national effectiveness of development aid: Evidence from the World Bank," World Development, Elsevier, vol. 179(C).
    13. Dinuk Jayasuriya, 2011. "Improvements in the World Bank's Ease of Doing Business Rankings: Do they translate into greater foreign direct investment inflows?," Development Policy Centre Discussion Papers 1108, Development Policy Centre, Crawford School of Public Policy, The Australian National University.
    14. Junyan Tian, 2023. "Does agricultural official development assistance facilitate foreign direct investment in agriculture: Evidence from 63 developing countries," Journal of Agricultural Economics, Wiley Blackwell, vol. 74(3), pages 702-718, September.
    15. Aneta Bobeni? Hinto?ová, 2019. "Does inward foreign direct investment influence macroeconomic performance? A case of Slovakia," Proceedings of International Academic Conferences 9811998, International Institute of Social and Economic Sciences.
    16. Annageldy Arazmuradov, 2012. "Foreign Aid, Foreign Direct Investment, and Domestic Investment Nexus in Landlocked Economies of Central Asia," Economic Research Guardian, Mutascu Publishing, vol. 2(1), pages 129-151, May.
    17. Jing Shao & Maojun Wang, 2020. "Analyzing the spatial allocation of Japan’s aid to China: A perspective from the relations between aid allocation stakeholders," Growth and Change, Wiley Blackwell, vol. 51(3), pages 1277-1303, September.
    18. Chauvet, Lisa & Ehrhart, Hélène, 2018. "Aid and growth: evidence from firm-level data," Journal of Development Economics, Elsevier, vol. 135(C), pages 461-477.
    19. Geonwoo Park & Heon Joo Jung, 2020. "South Korea’s outward direct investment and its dyadic determinants: Foreign aid, bilateral treaty and economic diplomacy," The World Economy, Wiley Blackwell, vol. 43(12), pages 3296-3313, December.
    20. Garriga, Ana Carolina & Phillips, Brian John, 2014. "Foreign Aid as a Signal to Investors: Predicting FDI in Post-Conflict Countries," MPRA Paper 88643, University Library of Munich, Germany.

    More about this item

    Keywords

    ;
    ;
    ;

    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

    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:zbw:cegedp:336810. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/cdgoede.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.