Does Foreign Aid Increase Foreign Direct Investment?
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Does Foreign Aid Increase Foreign Direct Investment? / Selaya, Pablo; Sunesen, Eva Rytter.
Department of Economics, University of Copenhagen, 2008.Research output: Working paper › Research
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TY - UNPB
T1 - Does Foreign Aid Increase Foreign Direct Investment?
AU - Selaya, Pablo
AU - Sunesen, Eva Rytter
N1 - JEL classifications: F21, F35, H40, O19
PY - 2008
Y1 - 2008
N2 - The notion that foreign aid and foreign direct investment (FDI) are complementary sources of capital is conventional among governments and internationalcooperation agencies. This paper argues that the notion is incomplete. Within the framework of an open economy Solow model we show that the theoretical relationship between foreign aid and FDI is indeterminate. Aid may raise the marginal productivity of capital by financing complementary inputs, such as public infrastructure projects and human capital investment. However, aid may also crowd out productive private investments if it comes in the shape of physical capital transfers. We therefore turn to an empirical analysis of the relationship between FDI and disaggregated aid flows. Our results strongly support the hypotheses that aid invested in complementary inputs draws in foreign capital while aid invested in physical capital crowds out FDI. The combined effect of these two types of aid is small but on average positive
AB - The notion that foreign aid and foreign direct investment (FDI) are complementary sources of capital is conventional among governments and internationalcooperation agencies. This paper argues that the notion is incomplete. Within the framework of an open economy Solow model we show that the theoretical relationship between foreign aid and FDI is indeterminate. Aid may raise the marginal productivity of capital by financing complementary inputs, such as public infrastructure projects and human capital investment. However, aid may also crowd out productive private investments if it comes in the shape of physical capital transfers. We therefore turn to an empirical analysis of the relationship between FDI and disaggregated aid flows. Our results strongly support the hypotheses that aid invested in complementary inputs draws in foreign capital while aid invested in physical capital crowds out FDI. The combined effect of these two types of aid is small but on average positive
KW - Faculty of Social Sciences
KW - FDI
KW - open economy Solow model
M3 - Working paper
BT - Does Foreign Aid Increase Foreign Direct Investment?
PB - Department of Economics, University of Copenhagen
ER -
ID: 2751902