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Is Foreign Aid a Vanguard of FDI? A Gravity-Equation Approach

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  • KIMURA Hidemi
  • TODO Yasuyuki

Abstract

This paper investigates whether and how foreign aid facilitates foreign direct investment (FDI) flows into less developed countries. We employ a large data set of source-recipient country pairs and conduct gravity equation-type estimation. Our empirical methodology enables us to distinguish among three effects of aid on FDI: a positive "infrastructure effect," a negative "rent-seeking effect," and a positive "vanguard effect," which is specific to the same source-recipient country pair of aid and FDI. According to our empirical analysis, foreign aid in general does not necessarily have an infrastructure, rent-seeking, or vanguard effect. However, we find robust evidence that foreign aid from Japan has a vanguard effect, while aid from other donor countries reveals no such effect. This vanguard effect seems to be peculiar to the Japanese foreign aid.

Suggested Citation

  • KIMURA Hidemi & TODO Yasuyuki, 2007. "Is Foreign Aid a Vanguard of FDI? A Gravity-Equation Approach," Discussion papers 07007, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:07007
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    1. Asiedu, Elizabeth & Jin, Yi & Nandwa, Boaz, 2009. "Does foreign aid mitigate the adverse effect of expropriation risk on foreign direct investment?," Journal of International Economics, Elsevier, vol. 78(2), pages 268-275, July.
    2. Raza, Syed Ali & Sabir, Muhammad Sarwar & Mehboob, Farhan, 2011. "Capital inflows and economic growth in Pakistan," MPRA Paper 36790, University Library of Munich, Germany.
    3. Séverine Blaise, 2009. "Japanese Aid as a Prerequisite for FDI : The Case of Southeast Asian Countries," Finance Working Papers 22767, East Asian Bureau of Economic Research.
    4. Yasuyuki Sawada & Ayako Matsuda & Hidemi Kimura, 2012. "On The Role Of Technical Cooperation In International Technology Transfers," Journal of International Development, John Wiley & Sons, Ltd., vol. 24(3), pages 316-340, April.
    5. Kang, Sung Jin & Lee, Hongshik & Park, Bokyeong, 2011. "Does Korea follow Japan in foreign aid? Relationships between aid and foreign investment," Japan and the World Economy, Elsevier, vol. 23(1), pages 19-27, January.
    6. Simone Bertoli & Giovanni Andrea Cornia & Francesco Manaresi, 2007. "Aid performance and its determinants. A comparison of Italy with the OECD norm," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 60(242), pages 271-321.
    7. Simone Bertoli & Giovanni Andrea Cornia & Francesco Manaresi, 2007. "Aid performance and its determinants. A comparison of Italy with the OECD norm," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 60(242), pages 271-321.
    8. Carro, Martha & Larrú, José María, 2010. "Flowing Together or Flowing Apart: An Analysis of the Relation between FDI and ODA Flows to Argentina and Brazil," MPRA Paper 25064, University Library of Munich, Germany.

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