Effectiveness of Foreign Aid in Facilitating Foreign Direct Investment: Evidence from Four South Asian Countries

Abstract

This empirical study investigates whether foreign aid is effective in facilitating foreign direct investment inflows into the selected South Asian countries during the period of 1995-2012. Using panel data, the fixed-effects estimator is employed. The results derived from this study suggest that infrastructure aid is effective in facilitating FDI into the South Asian countries of which aid for social infrastructure is relatively more effective than that of other types of aid. In the donor side, aid from UK has significant effect on FDI whereas aid from USA, Germany and Netherlands has marginal effect. The aid from Japan does not facilitate FDI flow into these recipient countries.