Does foreign aid mitigate the adverse effect of expropriation risk on foreign direct investment?

Elizabeth Asiedu, Yi Jin and Boaz Nandwa

Journal of International Economics, 2009, vol. 78, issue 2, pages 268-275

Abstract: We construct a model of FDI, risk and aid, where a country loses access to FDI and aid if the country expropriates FDI. We show that: (i) the threat of expropriation leads to under-investment; (ii) the optimal level of FDI decreases as the risk of expropriation rises; and (iii) aid mitigates the adverse effect of expropriation risk on FDI. The empirical analysis employs data for 35 low-income countries and 28 countries in Sub-Saharan Africa, over the period 1983-2004. We find that risk has a negative effect on FDI and that aid mitigates but cannot eliminate the adverse effect of risk.

Keywords: Expropriation; Foreign; aid; FDI; Risk; Sub-Saharan; Africa (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:inecon:v:78:y:2009:i:2:p:268-275

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