Abstract
In recent years, the global development community has been emphasizing blended finance approaches for economic development without taking into consideration practical implications of the Lucas Paradox, or the observation that capital does not flow from rich to poor countries. To prevent misuse of official development funds as catalysts for private flows, it is crucial to consider the direction of blended finance approaches in light of the Lucas Paradox. To fill this important gap in the literature, this paper investigates determinants of capital flows in recipient countries where a blended finance strategy is applied in light of the Lucas Paradox, with a focus on foreign direct investment and portfolio equity investment. For the analysis, this paper utilizes a cross-sectional sample of 157 countries between 2002 and 2018, including ODA recipients and OECD DAC members, by conducting a regression analysis based on the ordinary least squares (OLS). Our findings suggest that the Lucas Paradox strongly exists in all recipient countries that can utilize ODA as a catalyst, which is the core of the blended finance strategy. Institutional quality, human capital and asymmetric information improvement appear to mitigate the Lucas Paradox, although the paradox does not disappear entirely. In addition, total ODA, institutional and human capital appear to be determinants of the paradox in the multiple regression model.
Highlights
Academic Editor: Bruce MorleyWhile organizations such as the UK’s CDC group and the International Finance Corporation (IFC) have emphasized the need to crowd in private investments to address global development challenges since the 1950s, the international community has generally responded to a lack of development funds by increasing the amount of official development assistance (ODA) on the basis of the 1969 Pearson Report [1]
Our findings suggest that the Lucas Paradox strongly exists in all recipient countries that can utilize ODA as a catalyst, which is the core of the blended finance strategy
This study would provide the first diagnosis of the Lucas Paradox for recipient countries under the support of OECD DAC, as the analysis focuses on blended finance approaches that strategically use official development finance to promote private capital flows
Summary
Action Agenda (AAAA) presented a global framework for financing sustainable development through an increase in ODA volume, mobilization of domestic public resources, international trade for development and management of debt sustainability, at the heart of the agenda was attracting private capital. Given these trends, the international community has become more enthusiastic about the possibility of harnessing private capital for sustainable development [4,5].
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