Does Foreign Aid Increase Foreign Direct Investment?

Pablo Selaya and Eva Rytter Sunesen

World Development, 2012, vol. 40, issue 11, 2155-2176

Abstract: We examine the idea that aid and foreign direct investment (FDI) are complementary sources of foreign capital. We argue that the relationship between aid and FDI is theoretically ambiguous: aid raises the marginal productivity of capital when used to finance complementary inputs (like public infrastructure and human capital investments), but aid may crowd out private investments when it comes in the shape of pure physical capital transfers. Empirically, we find that aid invested in complementary inputs draws in FDI, while aid invested in physical capital crowds it out. The paper shows that the composition of aid matters for its overall level of efficiency.

Keywords: development aid; foreign direct investment (FDI); foreign capital for development; aid effectiveness (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (79)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0305750X1200160X
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Does Foreign Aid Increase Foreign Direct Investment? (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:wdevel:v:40:y:2012:i:11:p:2155-2176

DOI: 10.1016/j.worlddev.2012.06.001

Access Statistics for this article

World Development is currently edited by O. T. Coomes

More articles in World Development from Elsevier
Bibliographic data for series maintained by Catherine Liu ().