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Does Foreign Aid Mitigate the Adverse Effect of Expropriation Risk on Foreign Direct Investment?

Author

Listed:
  • Elizabeth Asiedu

    (Department of Economics, The University of Kansas)

  • Yi Jin

    (Department of Economics, University of Kansas)

  • Boaz Nandwa

    (Economic Growth Center, Yale University)

Abstract

We construct a model of FDI, risk and aid, where a country loses access to FDI and aid if the country expropriates FDI. We show that: (i) The threat of expropri- ation leads to under-investment; (ii) The optimal level of FDI decreases as the risk of expropriation rises; and (iii) Under certain conditions, aid mitigates the adverse e¤ect of expropriation risk on FDI. The empirical analysis employs data for 35 low- income countries and 28 countries in Sub-Saharan Africa, over the period 1983-2004. We ?nd that risk has a negative e¤ect on FDI, aid mitigates the adverse effect of risk on FDI, and that bilateral and multilateral aid are roughly equivalent at achieving these results. We also provide an estimate of the level of aid that would eliminate expropriation risk, and ?nd that for low-income countries, the amount of aid would need to at least double in order for aid to completely offset the effect of risk.

Suggested Citation

  • Elizabeth Asiedu & Yi Jin & Boaz Nandwa, 2009. "Does Foreign Aid Mitigate the Adverse Effect of Expropriation Risk on Foreign Direct Investment?," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200905, University of Kansas, Department of Economics.
    • Handle: RePEc:kan:wpaper:200905
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    More about this item

    Keywords

    Expropriation; Foreign Aid; FDI; Risk; Sub-Saharan Africa.;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • I20 - Health, Education, and Welfare - - Education - - - General
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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