CAN DEVELOPMENT AID HELP PROMOTE FOREIGN DIRECT INVESTMENT? EVIDENCE FROM CENTRAL ASIA

There is a continuing debate on the effectiveness of development aid. One less obvious angle on this issue is the question of the likely impact of aid on foreign direct investment (FDI). This paper tests whether aid had any impact on incoming FDI in Central Asian economies during the period 1993-2008. A simple panel model suggests that (a) aid had a moderate complementary effect on inward FDI, (b) there was a crowding-out effect such that domestic investment reduced FDI stocks, (c) natural resources were a key attraction for private capital, and (d) increases in development aid offset the crowding-out effect of domestic capital on FDI. It is argued that donors should target aid to enhance the climate for inward investment.