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Impact of international development aid on FDI along the Belt and Road

Hongwei Liao, Yedi Chi and Jiarui Zhang

China Economic Review, 2020, vol. 61, issue C

Abstract: Both IDA and FDI are very important external financing channels for B&R countries. Considering B&R countries as the sample, this paper analyzes the impact of the IDA received by B&R countries on their FDI from both theoretical and empirical perspectives. Based on the different research objectives and data availability, the empirical analysis is considered as two sections. In the time series analysis, we use VECM model and the impulse response function to test the dynamic effects of different types of IDA on the FDI from the perspective of donor countries, and find that whether in the short, medium or long term, the complementary factor form of the aid to the recipient countries can promote FDI, and the material capital form of the aid to the recipient countries can crowd out their FDI. In the panel regression analysis, we examine the overall impact of the total amount of IDA accepted by the B&R recipient countries on FDI, including the direct impact of IDA on FDI and the moderating effects of institutional environment. Considering the direct impact, the results of the fixed effect regression analysis confirm the significantly negative effects of total IDA accepted by B&R recipient countries on their FDI. In the regression analysis of controlling endogeneity problem, the product terms of IDA variables and institutional environment variables are added to the regression models, and the results show that the institutional environment has significantly positive moderating effects in the process of IDA influencing FDI, indicating that the interaction between IDA and institutional environment helps to improve the impact of IDA on FDI and increase the attractiveness of recipient countries to FDI.

Keywords: B&R; Complementary factor form aid; Material capital form aid; FDI; Institutional environment (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:61:y:2020:i:c:s1043951x20300456

DOI: 10.1016/j.chieco.2020.101448

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China Economic Review is currently edited by B.M. Fleisher, K. X. D. Huang, M.E. Lovely, Y. Wen, X. Zhang and X. Zhu

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