The nexus between Institutions, foreign Aid and foreign direct investment

Abstract

This paper examines the mutual relationship between foreign aid and foreign direct investment (FDI), which might be ambiguous by reverse causality or simultaneity problems. Using the dual-approach dynamics-balanced (DADB) model, we are able to point out that both bilateral and multilateral aid could lead to more FDI, and the impact of the latter could be even larger than that of the former. The institutional effect of multilateral aid is proposed to explain this phenomenon. Interestingly, the role of political stability could surpass those of democracy and control of corruption in having more aid disbursements.