Does aid matter for FDI in ECOWAS: Investigating the infrastructure channel

Abstract

This paper investigates whether and how aid targeted at specific subcategories of economic infrastructure could assist the economies of 14 Economic Community of West African States to attract higher foreign direct investment (FDI) inflow via improvement in infrastructure in water supply and sanitation, energy, transport and ICT. By relying on the three stage least squares estimation technique that is able to account for endogeneity among structural equations, and utilizing data spanning 2005-2018, we found quite interesting results. First, aid targeted at infrastructure indicates a strong positive effect on the countries' infrastructure endowment. Second, there is robust evidence that aid promotes FDI, but not necessarily through the infrastructure channel. Targeted aid appears to exert a positive and direct knock-on effect on FDI-apparently, because investors anticipate the positive effect that targeted aid is almost always inclined to produce on host countries' infrastructure endowment. Finally, aid allocation by Development Assistance Committee donors seems to have been primarily merit-based, followed by weaker evidence for "need". The study recommends, inter alia, more need-based aid allocation, particularly in economies where initial infrastructure endowment is minimal.

Making aid work: institutional thresholds and FDI

“…Donaubauer et al (2016) suggest that aid in infrastructure improves the endowment in transportation, communication, energy and finance which, in turn, attracts a higher flow of FDI. Meanwhile, Onye et al (2022) conducted a study for a sample of 14 Economic Community of West African States and found that aid contributes positively to water supply and sanitation, energy, transport and Information and Communication Technology (ICT). However, the transmission effect through infrastructure seems unnecessary as foreign aid might have a direct and positive effect on FDI.…”

On the allocation puzzle and capital flows: Evidence from foreign direct investment and real sector growth in Africa

“…The Organisation for Economic Co‐operation and Development (2008) notes the relevance of FDI to many economies. Even though some studies have found that FDI may be affected by economic uncertainties (Asamoah et al, 2022; Moraghen et al, 2021), Onye et al (2022) and Levchenko and Paolo (2007) suggest that flows of such nature help economies avoid the uncertainties associated with dependence on short‐term flows for investment and growth.…”