Using a panel dataset of 105 developing countries for the period 2003–15, this paper assesses the effects of Aid for Trade (AfT) on greenfield FDI flows to the aid‐recipient countries. Particularly, this paper classifies the total dollar value of greenfield FDI flows to each recipient country in terms of four different layers: the extensive and intensive margins of projects as well as the extensive and intensive margins of source countries. Applying the system GMM estimator, this paper finds that AfT not only increases the dollar value of FDI flows to the recipient countries but also helps diversify the greenfield projects and source countries. In addition, this paper finds that AfT has a greater effect for greenfield FDI from donor (developed) countries than from non‐donor (developing) countries. Among the three components of AfT, aid for trade‐related infrastructure and aid for trade policy regulations are found to have positive links with greenfield FDI, irrespective of source‐country groups, yet their effects are larger for developed source countries. In contrast, aid for building productive capacity hinders greenfield FDI flows from non‐donor countries, while it promotes greenfield FDI from donor countries. We offer some explanations for this finding.
aid for trade, developing countries, import diversification | INTRODUCTIONThe Aid for Trade Initiative, which was launched at the 2005 World Trade Organization (WTO) Ministerial Conference held in Hong Kong, aims to expand developing countries' access to global markets by addressing their supply-side capacity and trade-related infrastructure constraints. Aid for Trade (AfT) is part of overall Official Development Assistance (ODA) and has three components: Aid for trade-related infrastructure, Aid for building productive capacity and Aid for trade policy regulations and trade-related adjustment.Previous studies find that AfT is effective in promoting trade in recipient countries. For example, Cali and Te Velde ( 2011), Vijil and Wagner (2012), and Hühne et al. (2015) uncover a positive effect of AfT on the value of exports of recipient countries. Furthermore, Helble et al. (2012), Pettersson and Johansson (2013), and Hühne et al. ( 2014) find that AfT increases recipients' imports from donor countries. All these studies defined the outcome of AfT as trade value. However, AfT can not only expand trade but also diversify trade. For example, Kim (2019) and Gnangnon (2019) conclude that AfT plays an important role in the export diversification of recipient countries. Still, most existing studies look at exports rather than the other side of the story-import. Yet import diversification is essential for improving productivity and expanding access to superior technology (Cadot et al., 2013).We fill this gap in the literature by delving into the effect of AfT on import diversification. Using a panel dataset of 104 countries from 2003 to 2016, we find that AfT helps recipient countries diversify their imports. Specifically, AfT promotes import diversification by increasing the number of both import commodities and import partner countries. Our evidence also reveals that AfT promotes imports from both Development Assistance Committee (DAC) member countries (i.e., donor countries) and Non-DAC countries (i.e., non-donor countries). Lastly, we find that all three components of AfT contribute significantly to the import diversification of recipient countries.The rest of the paper is organised as follows. Section 2 presents the literature review and Section 3 offers descriptive statistics of AfT and import diversification. Section 4 provides the empirical framework. Section 5 reports and discusses the empirical results, and Section 6 concludes the paper.
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