Quotation Donaubauer, Julian and Meyer, Birgit Elisabeth and Nunnenkamp, Peter. 2016. Aid, Infrastructure, and FDI: Assessing the Transmission Channel with a New Index of Infrastructure. World Development 78 S. 230-245.


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Abstract

Official development assistance (ODA) and foreign direct investment (FDI) are widely perceived to be alternative means of supplementing domestic savings and promoting economic development in low- and middle-income countries. However, possible complementarities of aid and FDI have received limited attention so far. It remains open to debate whether aid could render recipient countries more attractive to FDI by removing specific bottlenecks that prevent higher FDI inflows. In particular, we raise the hypothesis that aid specifically targeted at economic infrastructure helps developing countries attract higher FDI inflows through improving their endowment with infrastructure in transportation, communication, energy, and finance. By performing 3SLS estimations we explicitly account for dependencies between three structural equations on the allocation of sector-specific aid, the determinants of infrastructure, and the determinants of FDI. We find strong and robust evidence that aid in infrastructure is effective in improving the recipient countries’ endowment with infrastructure. In sharp contrast, other aid is not effective in improving infrastructure. Infrastructure consistently proves to be an important determinant of developing countries’ attractiveness to FDI. Consequently, only targeted aid promotes FDI indirectly through the infrastructure channel. In addition, aid in infrastructure has direct effects on FDI. It appears that foreign investors anticipate longer term effects of aid on the country’s endowment with infrastructure and expect aid-financed infrastructure to serve them particularly well.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal World Development
Citation Index SSCI
WU Journalrating 2009 A
WU-Journal-Rating new FIN-A, VW-B, WH-B
Language English
Title Aid, Infrastructure, and FDI: Assessing the Transmission Channel with a New Index of Infrastructure
Volume 78
Year 2016
Page from 230
Page to 245
Reviewed? Y
DOI http://dx.doi.org/10.1016/j.worlddev.2015.10.015

Associations

People
Meyer, Birgit Elisabeth (Details)
External
Donaubauer, Julian (Helmut-Schmidt University Hamburg, Germany)
Nunnenkamp, Peter (Kiel Institute for the World Economy, Germany)
Organization
Institute for International Economics IN (Details)
Research areas (Ă–STAT Classification 'Statistik Austria')
5309 Foreign aid (Details)
5323 Econometrics (Details)
5334 Political economic policy (Details)
5341 Economic policy (Details)
5344 Foreign trade (Details)
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