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

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.


Issue Date:
2003
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/26128
Total Pages:
37
JEL Codes:
F35; F21; O16; O19
Series Statement:
HWWA Discussion Paper 246




 Record created 2017-04-01, last modified 2017-08-24

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