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Foreign aid and Foreign direct investment in Sub-Saharan Africa: A panel data analysis

Funding constraints experienced by Sub-Saharan African (SSA) countries has led to reliance on foreign direct investment (FDI) and foreign aid as alternative sources of finance. Despite the importance of FDI for growth, SSA has failed to attract an increasing share of global FDI and at the same time faces volatile aid flows. This study examines the role of foreign aid in enhancing FDI inflows to 31 SSA countries for the period 1995 to 2012. Using panel data estimation techniques, the results suggest that productive infrastructure aid is complementary to FDI inflows and socio-economic infrastructure aid has no significant impact on FDI inflows. When resource (oil) motive of FDI is considered, the results indicate that productive and socio-economic infrastructure aid to oil-producing SSA countries results in less FDI inflows compared to non-oil producing SSA countries. Finally, the significance of sectoral aid analysis is highlighted by the finding of a complementary role of energy infrastructure aid to FDI inflows and an insignificant impact of transport infrastructure aid.

Working paper 612
1 June 2016
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