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

37 Pages Posted: 26 Oct 2003

See all articles by Philipp Harms

Philipp Harms

Study Centre Gerzensee

Matthias Lutz

Swiss National Bank; University of St. Gallen

Date Written: 2003

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.

Keywords: Aid, Foreign Direct Investment, Institutions

JEL Classification: F35, F21, O16, O19

Suggested Citation

Harms, Philipp and Lutz, Matthias, Aid, Governance, and Private Foreign Investment: Some Puzzling Findings and a Possible Explanation (2003). Available at SSRN: https://ssrn.com/abstract=447462 or http://dx.doi.org/10.2139/ssrn.447462

Philipp Harms

Study Centre Gerzensee ( email )

CH-3115 Gerzensee
Switzerland

Matthias Lutz (Contact Author)

Swiss National Bank ( email )

Borsenstrasse 15
Zurich, 8022
Switzerland
+41 44 631 36 19 (Phone)

University of St. Gallen ( email )

Bodanstrasse 1
CH-9000 St. Gallen
Switzerland
+41/71/224 23 11 (Phone)

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