Foreign Aid as a Signal to Investors

Ana Carolina Garriga and Brian J. Phillips
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Brian J. Phillips: División de Estudios Internacionales, Centro de Investigación y Docencia Económicas (CIDE), Mexico City, Mexico

Journal of Conflict Resolution, 2014, vol. 58, issue 2, 280-306

Abstract: Does development aid attract foreign direct investment (FDI) in post-conflict countries? This article contributes to the growing literature on effects of aid and on determinants of FDI by explaining how development aid in low-information environments is a signal that can attract investment. Before investing abroad, firms seek data on potential host countries. In post-conflict countries, reliable information is poor, in part because governments face unusual incentives to misrepresent information. In these conditions, firms look to signals. One is development aid, because donors tend to give more to countries they trust to properly handle the funds. Our results show that aid seems to draw FDI—however, this is conditional on whether the aid can be considered geostrategically motivated. We also show that this effect decreases as time elapses after the conflict. This suggests that aid’s signaling effect is specific to low-information environments, and helps rule out alternative causal mechanisms linking aid and FDI.

Keywords: aid; FDI; civil war; post-conflict; geostrategic aid (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:sae:jocore:v:58:y:2014:i:2:p:280-306

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