This article challenges a long-held development-policy assumption that aid and foreign-direct investment~FDI! serve as substitutes or complements in accelerating the development of the world's poorer countries+ We show both theoretically and empirically that aid and FDI affect development differently+ Aid contributes powerfully to both economic growth and human development, and the higher the level of human capital in a country, the more aid contributes+ By contrast, FDI, at best, has no effect on economic growth and actually slows the rate of human development in less-developed countries+ We find no evidence that the degree of democratic responsiveness in government conditions the effectiveness of either aid or FDI, although we do find that democracy independently increases human development in all but the most developed countries+ Our results demonstrate that FDI and aid are not, and cannot be, substitutes in the development of the world's poorer countries+ Nor even can they be thought of as complements-certainly not at mid to low levels of devel-opment+ In the end, poor countries need democracy and aid, not FDI+ But as important as official assistance is to improving people's lives, the reality is that it is trade and private capital flows that will make the real difference that are more, more, much more significant+ U+S+ Secretary of State Colin Powell 1In the dialogue on sustainable development, it is widely accepted that even the most promising less-developed country often lacks the resources to fund its own development and must look to foreign capital to augment domestic sources+ These foreign capital inflows come most commonly in two forms: foreign aid, and

Bilateral investment treaties, Foreign direct investment, Political risk, International institutions, F21, F23, O16, O19,

Bilateral Investment Treaty's effects on FDI and the domestic business environment remain unexplored despite the proliferation of treaties over the past several years. This paper asks whether BITs stimulate FDI flows to host countries, and if the treaties have any impact on the environment for domestic private investment. We find a weak relationship between BITs and FDI. However, for risky countries, BITs attract greater amounts of FDI. We also find a weak relationship between BITs and the domestic investment environment. Thus, while BITs may not alter the domestic investment environment, they also may not be fulfilling their primary objective.

The landscape of the global economy is dotted with institutions that regulate investment and trade. In recent years, the number of bilateral investment treaties (BITs) and preferential trade agreements (PTAs), in particular, has grown at a torrid pace; practically every country is a member of at least one—if not many—of these institutions. For all the scholarly attention that these institutions have received, however, there is little research tying BITs and PTAs together. This is surprising, since both aim to increase commerce by making it more predictable. The authors seek to fill this gap in the literature. They argue that a BIT between a developed and a developing country should make it more likely that this pair of states will subsequently form a PTA. That said, the wrinkle in the story is that more is not better in this regard; the authors further argue that a developing country that has many BITs is less likely to conclude a PTA with a wealthy state. The authors test these hypotheses using annual data on pairs of developing and developed countries between 1960 and 2004 and find strong evidence in support of their argument.

This paper analyzes multilateral aid allocation in the European Union (EU). We argue that EU members can influence the aid allocation process toward their national interests if they form powerful coalitions that bias the European Commission's development policies. When EU members' preferences over aid allocation are heterogeneous, the Commission can implement multilateral aid according to its programmatic goals. Greater homogeneity of EU members' goals, however, increases the likelihood that members can form powerful interest coalitions and induce the Commission to allocate aid according to their own national interests. The empirical analysis provides robust support for our theoretical argument, and the findings generally indicate that interest coalitions play an important role in multilateral aid allocation.