Working Paper
Aid, Infrastructure, and FDI: Assessing the Transmission Channel with a New Index of Infrastructure
Kiel Working Papers, 1954
Authors
Publication Date
JEL Classification
F21
F35
O18
Key Words
Related Topics
Foreign Direct Investments
Emerging Markets & Developing Countries
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 fairly strong and robust evidence that targeted aid promotes FDI indirectly through the infrastructure channel. In addition, aid in infrastructure appears to have surprisingly strong direct effects on FDI.
