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

Hidemi Kimura and Yasuyuki Todo
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Hidemi Kimura: Australia-Japan Research Centre

Development Economics Working Papers from East Asian Bureau of Economic Research

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.

Keywords: foreign aid; foreign direct investment; gravity equation (search for similar items in EconPapers)
JEL-codes: F21 F35 O11 (search for similar items in EconPapers)
Date: 2009-01
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Is Foreign Aid a Vanguard of Foreign Direct Investment? A Gravity-Equation Approach (2010)
Working Paper: Is Foreign Aid a Vanguard of Foreign Direct Investment? A Gravity-Equation Approach (2009)
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