Roads to Investment: Implaction of Infractructure Development Aid on Private & Foreign Investment in SSA

Investing in infrastructure as a means to foster investment and development in aid recipient countries has been a priority of bilateral and multilateral donor institutions in recent years, with infrastructure related aid commitments accounting for 58 percent of the total amount of worldwide donor commitments. This thesis investigates the question whether infrastructure related foreign aid significantly contributed to the attractiveness of Sub Saharan African countries for foreign and private investment, analyzing the impact in a region that is considered to host both, the least infrastructure endowment as well as the lowest investment rates worldwide. The panel data cross-country analysis conducted applies the method of disaggregated aid flows, as well as addresses the problem of potential endogeneity of aid and investment variables by the use of the GMM estimation technique. The results show that foreign aid has not achieved its targets of fostering investment in SSA as a means to spur growth. Furthermore, it could show that the negative rent-seeking effects that are considered to result from noninfrastructure targeting commitments are influencing investment decisions, especially for the case of private investment, even when political conditions are considered. For the case of FDI, the impact was not as robust, but showed that infrastructure aid is negatively affecting investment inflows in the case of better governance and disregarding governance indicators, supporting the idea of a rent-seeking effect.