FDI and growth
The coherence of trade flows and trade policies with aid and investment flows: a background paper
Some studies suggest that access to rich-country markets may be more important than aid
Authors:
A. Suwa- Eisenmann; T. Verdier
Publisher:
OECD Development Centre, 2006
This paper provides an overview of the relationships among trade, aid and foreign direct investment (FDI), both in terms of policy interactions and interactions among resource flows. It discusses both the theoretical analyses and the extent to which the outcomes these models predict are supported by empirical studies.
Findings from this analysis include:
- there is complementarity between trade and FDI flows and policies
- there is a risk of a two-tier system in which emerging developing countries (East Asia, South Asia and China) would attract both investment and trade while other less-developed economies (in sub-Saharan Africa) would not
- in the classical “aid vs. trade” debate, the theoretical arguments would urge aid, a more direct instrument, over market access. The balance might change, however, if countervailing terms-of-trade effects are significant (immiserising aid) and if learning through exports is possible through productivity gains in exporting firms that might spill over to non-exporting firms
- in analysing the relationships between aid, trade and FDI, there has been a lack of empirical analyses of: the impact of different policy instruments; the role of institutions affect complementarities; the disaggregated effects of aid, trade and FDI; lagged effects; distributive effects within countries and thus political-economy issues
