Geographic Statistical Analysis of the Relationship between Foreign Aid and Foreign Investment
Dr. Michael Nicholson

Global demarcations exist between development aid and foreign direct investment. In some core areas, however, certain cross-regional patterns are quite strong relative to trends in other regions. Rigorous statistical analysis that contrasts the relative influences of time-series panel data clusters “super-regions” with otherwise widely varying characteristics, classified as either “aid-oriented” or “investment-oriented” regions. As stated explicitly when setting out the identification strategy below, this paper is agnostic as to whether “aid causes growth” or “investment causes growth.” We are quite vigorous, however, in analyzing whether and when aid might “cause” investment. A series of Granger causality tests that incorporate recent innovations in the analysis of heterogeneous panel data demonstrate that global demarcations exist between foreign aid and foreign investment that differ substantially among various regions. Evidence-based support for international development policy should appropriately account for these cross-region similarities when developing policies on the incentives for foreign investment and market-based economic growth.

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