Aid, Governance and Private Foreign Investment: Some Puzzling Findings for the 1990s

Philipp Harms · Matthias G. Lutz

152 citations0/0 files storedThe Economic Journal

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International Development and Aid International Business and FDI Global trade and economics

Abstract

Does official aid pave the road for private foreign investment or does it suffocate private initiative by diverting resources towards unproductive activities? We explore this question using panel data covering a large number of developing and emerging economies during the 1990s. Controlling for countries’ institutional environment, we find that, evaluated at the mean, the marginal effect of aid on private foreign investment is close to zero. Surprisingly, however, the effect is strictly positive for countries in which private agents face a substantial regulatory burden. This result is robust across a wide range of specifications, samples and estimation methods.

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References

2001Econometric Analysis of Cross Section and Panel Data n.d.Aid, Policies, and Growth 1996Politics and the effectiveness of foreign aid 2001Aid and growth regressions 2004Effects on Financial Globalization on Developing Countries: Some Empirical Evidence 2003Can Foreign Aid Buy Growth?2001The Determinants of Foreign Direct Investments: Sensitivity Analyses of Cross‐Country Regressions 2002Aid allocation and poverty reduction

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