Aid and foreign direct investment: substitutes, complements or neither?

Petr Jánský

12 citations0/0 files storedInternational Journal of Trade and Global Markets

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

Abstract

This paper examines whether official aid (Aid) and Foreign Direct Investment (FDI), defined here as shares of recipients’ gross domestic product, are substitutes, complements or neither. We hypothesise that there is no direct relationship between the two flows. We explain how we address endogeneity and heterogeneity issues through a number of econometric methods. Applying standard panel estimators on data for around 180 countries from 1971 to 2007, Aid and FDI seem to be substitutes even after controlling for Gross Domestic Product per Capita (GDPc). However, this correlation is not significant once we allow for parameter heterogeneity and common correlated effects. When we allow for endogeneity we find that there is no causal relationship between Aid and FDI, and that GDPc does impact on Aid, but not on FDI. We conclude that there is no evidence of causal relationship between Aid and FDI.

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References

1991Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations 1995Estimating long-run relationships from dynamic heterogeneous panels 2006Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure n.d.Aid, Policies, and Growth 2000Who Gives Foreign Aid to Whom and Why?2002Dynamic panel data models: a guide to micro data methods and practice 2017Why Doesn't Capital Flow from Rich to Poor Countries?2006Funding Self-Sustaining Development: The Role of Aid, FDI and Government in Economic Success

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