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Aid, Governance, and Private Foreign Investment: Some Puzzling Findings and a Possible Explanation

By Philipp Harms and Matthias Lutz

Abstract

Does official aid pave the road for private foreign investment or does it suffocate private initiative by diverting resources towards unproductive activities? In this paper we explore this question using data for a large number of developing and emerging economies. Controlling for countries' institutional environment, we find that, evaluated at the mean, the marginal effect of aid on private foreign investment is close to zero. Surprisingly, however, the effect is strictly positive for countries in which private agents face a substantial regulatory burden. After testing the robustness of this result, we offer a theoretical model that is able to rationalize our puzzling observation

Topics: F35, F21, O16, O19, ddc:330, Aid, Foreign Direct Investment, Institutions, Auslandsinvestition, Entwicklungshilfe, Investitionspolitik, Subvention, Sch\ue4tzung, Schwellenl\ue4nder, Entwicklungsl\ue4nder, Politische Instabilit\ue4t
Publisher: Gerzensee: Swiss National Bank, Study Center Gerzensee
Year: 2003
OAI identifier: oai:econstor.eu:10419/128019
Provided by: EconStor

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