1. Can FDI replace AID to some degree in the Developing Countries?
Dr. Helga Kristjánsdóttir
Introduction:
The objective of this research is to examine the substitution between aid flows and the flows of foreign direct investment (FDI) into some of the Heavily indebted poor countries (HIPC), receiving aid from the International Development Association (IDA).
IDA has the role of supporting anti-poverty programs in the poorest developing countries with provision of long-term, no interest loans.
Model and Data:
A simultaneous equation system is applied.
The research is based on World Bank aggregate FDI inflow data, and Aid inflow data from the International Development Association (IDA), listed by World Bank.
Also, Net financial flows obtained from IDA, defined as the disbursements of loans and credits less repayments of principal, together with GDP, Population, Land under cereal production (hectares), Current account balance, and Crop production index ( = 100).
The data set runs over 35 years from 1970 to 2004.
The simultaneous equation system looks as follows:
Estimation Results:
The simultaneous equation results indicate that as the HIPC countries income grows, there is a shift, so that aid and FDI flows substitute, rather than complement, each other. This may indicate that the HIPC countries, are likely to become more attractive to multinationals after receiving IDA aid over a period of time.
Conclusions:
Taken together, in the case of Ghana, FDI and AID are not found to support each other, that is they are found to be substitutes rather than complements.
When all the sample countries are included, FDI flows and aid flows are estimated to complement each other. These results can be found to support the hypothesis that when the HIPC countries experience higher income per capita, as is the case for Ghana in comparison with Malawi and Mozambique, complementary effects diminish at the cost of supplementary effects, with FDI inflows increasingly substituting for aid flows.