Aid for Trade, export product diversification, and foreign direct investment

Sèna Kimm Gnangnon

doi:10.1111/rode.12845

Abstract

AbstractThe few existing studies on the relationship between Aid for Trade (AfT) flows and inward foreign direct investment (FDI) tend to report a positive effect of total AfT flows, in particular of aid flows for building economic infrastructure, on FDI inflows. This article aims to complement these works by investigating whether the effect of AfT flows on inward FDI stock depends on recipient countries' level of export product concentration. Empirical analysis has shown that AfT flows exert a strong positive effect on inward FDI stock in countries that experience a high level of export product concentration. These findings are relevant for developing countries regarding the concentration of their export products on primary commodities and given the strong role of FDI flows for employment generation, economic growth, and development in these countries.

Highlights

Since the launch of the Aid for Trade (AfT) Initiative at the 2005 Hong Kong Ministerial Conference of the World Trade Organization (WTO), a growing number of studies have looked at the effectiveness of the AfT inflows that accrue to developing countries
The empirical analysis has shown that AfT flows exert a strong positive effect on inward Foreign Direct Investment (FDI) stock in countries that experience a high level of export product concentration
An increasing number of studies have been devoted to the trade impact of AfT, but the literature on AfT effectiveness has paid little attention to the impact of AfT flows on foreign direct investment (FDI) inflows, some studies have looked at the impact of development aid in general or some of its components on inward FDI

Summary

Introduction

Since the launch of the Aid for Trade (AfT) Initiative at the 2005 Hong Kong Ministerial Conference of the World Trade Organization (WTO), a growing number of studies have looked at the effectiveness of the AfT inflows that accrue to developing countries. Several studies have examined the impact of AfT on recipient-countries’ trade performance, in particular export performance (see for example a literature review in OECD-WTO, 2017). The objective of this Initiative is “to help developing countries, LDCs build the supply-side capacity and trade-related infrastructure that they need to assist them to implement and benefit from WTO Agreements and more broadly to expand their trade” (see Paragraph 57 of the Hong Kong Ministerial Declaration, see WTO, 2005). On the other hand, Gnangnon (2019c) has shown that countries that diversify their export product basket are likely to attract greater FDI inflows.

Brief literature review on the FDI effect of development aid

Model And Empirical Strategy

Conclusion

14. Bingley