Attracting foreign investment: Optimal ODA policy with trade liberalization

Ryusuke Ihara and Roki Iwahashi

Journal of International Trade & Economic Development, 2007, vol. 16, issue 2, pages 193-211

Abstract: This paper presents a theoretical framework for analyzing the efficient use of foreign aid (ODA) in attracting foreign direct investment, based on the variant of recent economic geography models. A salient result is that recipient countries with less trade openness should direct ODA towards social infrastructure, whereas it should be aimed toward developing economic infrastructure if the target country is a sufficiently open economy. The second result is that, in spite of optimal ODA policy, capital might outflow temporarily from less-developed countries at the beginning of trade liberalization. These results are consistent with empirical observations of 74 recipient countries for the time period 1991 - 2001.

Keywords: Aid policy; foreign direct investment; trade liberalization; new economic geography (search for similar items in EconPapers)
Date: 2007

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Persistent link: http://EconPapers.repec.org/RePEc:taf:jitecd:v:16:y:2007:i:2:p:193-211

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