Substitutability Between Foreign Direct Investment and Aid∗

Abstract

The objective of this paper is to examine the substitution between aid flows and the flows of foreign direct investment (FDI) between in some Heav-ily indebted poor countries. I use data running over 34 years from 1970 to 2004. I analyse this by means of simultaneous equiations system, allowing me to determine the substitutability between foreign direct investment and aid. Due to the small scale of flows, the model is analyzed with an inverse hy-perbolic sine function rather than a logarithmic function. Findings indicate that as the HIPC countries income grows, there is a shift from complemen-tary to substitutional effects between aid flows and FDI.

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