The Relationship between Aid and FDI and its Effect on Economic Growth

This paper empirically assesses the contribution of FDI and aid to economic growth in a panel of 139 developing countries over 23 years (1990-2012). This study makes a distinction between foreign aid and foreign infrastructure aid. The latter is foreign aid, which is purely targeted at infrastructural developments of a country. The relationship between aid and FDI is also tested in this paper. Furthermore, this study tries to find whether there is an enhanced combined effect of FDI and aid on growth. This study finds some result to support a significant positive relationship between foreign aid and FDI. A second result is that the positive effect of aid seems to be stronger when using the infrastructure aid variable. We could not verify that more aid combined with more FDI lead to a higher growth. The above findings are important, particularly in light of the role of aid on a developing country’s economic growth while recognizing its effect on the FDI inflows.