DOES INVESTMENT REPLACE AID AS COUNTRIES BECOME MORE DEVELOPED?

Abstract

This paper looks at the correlation between aid inflow and foreign direct investment inflow to the heavily indebted poor countries Malawi, Mozambique and Ghana, classified as developing countries. Data covers World Bank measures for aid and foreign direct investment in these countries. Also, crop production index is accounted for, as well as current account balance, and the gross domestic product of the countries analyzed. Dataset runs from 1970 through 2004, using a simultaneous equation system to determine the interrelation. Due to the occasional small scale of flow, the inverse hyperbolic sine function is used, rather than a logarithmic function. Results indicate that when the sample countries experience a higher income per capita, complementary effects diminish at the cost of supplementary effects. Therefore, FDI can be considered to replace aid after a certain development has been reached within the developing economies analyzed. The answer to the paper title is yes, investment does replace aid as countries become more developed.

Keywords

• Foreign Direct Investment, Aid, Developing Countries