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

Hidemi Kimura, Yasuyuki Todo

Research output: Contribution to journalArticle

60 Citations (Scopus)

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 examine an effect through which aid from a donor country promotes FDI from the same donor in particular, which we call a "vanguard effect." We find that foreign aid in general does not have any significant effect on FDI. However, when we allow for differences in the size of aid effects across donor countries, we find robust evidence that foreign aid from Japan in particular has a vanguard effect, i.e., Japanese aid promotes FDI from Japan but does not attract FDI from other countries.

Original languageEnglish
Pages (from-to)482-497
Number of pages16
JournalWorld Development
Volume38
Issue number4
DOIs
Publication statusPublished - 2010 Apr
Externally publishedYes

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foreign direct investment
direct investment
foreign investment
aid
gravity
Japan
capital flow
recipient
Gravity equation
Foreign aid
Foreign direct investment
effect
methodology
evidence

Keywords

  • foreign aid
  • foreign direct investment
  • gravity equation

ASJC Scopus subject areas

  • Economics and Econometrics
  • Development
  • Geography, Planning and Development
  • Sociology and Political Science

Cite this

Is Foreign Aid a Vanguard of Foreign Direct Investment? A Gravity-Equation Approach. / Kimura, Hidemi; Todo, Yasuyuki.

In: World Development, Vol. 38, No. 4, 04.2010, p. 482-497.

Research output: Contribution to journalArticle

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