Aid, Governance and Private Foreign Investment: Some Puzzling Findings for the 1990s

18 Pages Posted: 11 Jul 2006

See all articles by Philipp Harms

Philipp Harms

Study Centre Gerzensee

Matthias Lutz

Swiss National Bank; University of St. Gallen

Abstract

Does official aid pave the road for private foreign investment or does it suffocate private initiative by diverting resources towards unproductive activities? We explore this question using panel data covering a large number of developing and emerging economies during the 1990s. 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. This result is robust across a wide range of specifications, samples and estimation methods.

Suggested Citation

Harms, Philipp and Lutz, Matthias, Aid, Governance and Private Foreign Investment: Some Puzzling Findings for the 1990s. Economic Journal, Vol. 116, No. 513, pp. 773-790, July 2006, Available at SSRN: https://ssrn.com/abstract=916592 or http://dx.doi.org/10.1111/j.1468-0297.2006.01111.x

Philipp Harms (Contact Author)

Study Centre Gerzensee ( email )

CH-3115 Gerzensee
Switzerland

Matthias Lutz

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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