Does Foreign Aid increase Foreign Direct Investment?

TY - JOUR

T1 - Does Foreign Aid increase Foreign Direct Investment?

AU - Selaya, Pablo

AU - Sunesen, Eva Rytter

N1 - JEL classifications: F21; F35; O19.

PY - 2012/11

Y1 - 2012/11

N2 - We examine the idea that aid and foreign direct investment (FDI) are complementary sources of foreign capital. We argue that the relationship between aid and FDI is theoretically ambiguous: aid raises the marginal productivity of capital when used to finance complementary inputs (like public infrastructure and human capital investments), but aid may crowd out private investments when it comes in the shape of pure physical capital transfers. Empirically, we find that aid invested in complementary inputs draws in FDI, while aid invested in physical capital crowds it out. The paper shows that the composition of aid matters for its overall level of efficiency.

AB - We examine the idea that aid and foreign direct investment (FDI) are complementary sources of foreign capital. We argue that the relationship between aid and FDI is theoretically ambiguous: aid raises the marginal productivity of capital when used to finance complementary inputs (like public infrastructure and human capital investments), but aid may crowd out private investments when it comes in the shape of pure physical capital transfers. Empirically, we find that aid invested in complementary inputs draws in FDI, while aid invested in physical capital crowds it out. The paper shows that the composition of aid matters for its overall level of efficiency.

KW - Faculty of Social Sciences

KW - Development aid

KW - foreign direct investment (FDI)

KW - foreign capital for development

KW - aid effectiveness

U2 - 10.1016/j.worlddev.2012.06.001

DO - 10.1016/j.worlddev.2012.06.001

M3 - Journal article

SN - 0305-750X

VL - 40

SP - 2155

EP - 2176

JO - World Development

JF - World Development

IS - 11

ER -