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

Hidemi Kimura and Yasuyuki Todo

World Development, 2010, vol. 38, issue 4, 482-497

Abstract: Summary 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, i.e., 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)
Date: 2010
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Citations: View citations in EconPapers (72)

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Related works:
Working Paper: Is Foreign Aid a Vanguard of Foreign Direct Investment? A Gravity-Equation Approach (2009)
Working Paper: Is Foreign Aid a Vanguard of Foreign Direct Investment? A Gravity-Equation Approach (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:wdevel:v:38:y:2010:i:4:p:482-497

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