Does Aid for Education Attract Foreign Investors? An Empirical Analysis for Latin America

Abstract

Abstract:We address the question of whether foreign aid helps attract foreign direct investment (FDI). This could be achieved if well targeted aid removed critical impediments to higher FDI inflows. In particular, test the hypothesis that aid for education is an effective means to increase FDI flows to host countries in Latin America where schooling and education appears to be inadequate from the viewpoint of foreign investors. We employ panel data techniques covering 21 Latin American countries over the period from 1984 to 2008. We find that aid for education has a statistically significant positive effect on FDI. This effect is robust to potential outliers, sample selection, alternative specifications and different estimation methods.

Aid, Infrastructure, and FDI: Assessing the Transmission Channel with a New Index of Infrastructure

“…5 See Donaubauer et al (2014a) for a more detailed discussion of previous empirical studies. 6 Surprisingly, however, Harms and Lutz (2006) find positive effects of aid on FDI in host countries with considerable restrictions on FDI-related activities.…”

“…8 Dreher et al (2008) and D'Aiglepierre and Wagner (2013) find aid in education to be effective in improving educational outcome variables. Donaubauer et al (2014a) refer to the literature on effective aid in education, arguing that this type of aid may promote FDI by working through the channel of better education and qualification. Indeed they find aid in education to be positively associated with FDI flows to Latin American host countries, but their empirical model does not explicitly account for the assumed transmission mechanism.…”

Does foreign aid really attract foreign investors? New evidence from panel cointegration

“…On the other hand, aid may for example raise the productivity of capital when used to finance complementary factors of production (Selaya and Sunesen, 2012). This latter channel is well established in the empirical literature: aid seems to be effective in attracting foreign investors when it goes to specific sectors, especially infrastructure (Kapfer et al, 2007;Kimura and Todo, 2010) and education (Donaubauer et al, 2013). In the most prominent study on this issue, Harms and Lutz (2006) find positive effects of aid per se in countries where the regulatory burden on firms is high.…”

Private investment in transportation infrastructure in Brazil: the effects of state action

“…Other studies focused on Latin American countries show that private investments are also boosted with: higher levels of aid for education in the country (Donaubauer, Herzer, and Nunnenkamp, 2012); higher levels of economic freedom and a lower political risk (Amal and Seabra, 2007); and appreciation of local currency and inflation control/ reduction (Baingo, 2013). Freitas and Prates (1998) show that Argentina, Brazil, and Mexico were the Latin American countries that received most of the foreign capital invested since 1990.…”