Foreign Aid as a Signal to Investors: Predicting FDI in Post-Conflict Countries

Journal of Conflict Resolution March 2014 vol. 58 no. 2 280-306

49 Pages Posted: 13 Aug 2009 Last revised: 12 Jun 2015

See all articles by Ana Carolina Garriga

Ana Carolina Garriga

University of Essex - Department of Government

Brian J. Phillips

University of Essex - Department of Government; Centro de Investigación y Docencia Económicas (CIDE) - Division of International Studies

Date Written: 2012

Abstract

Does development aid attract FDI in post-conflict countries? This paper contributes to the growing literature on effects of aid and on determinants of FDI by explaining how development aid in low-information environments is a signal that can attract investment. Before investing abroad, firms seek data on potential host countries. In post-conflict countries, reliable information is poor, in part because governments face unusual incentives to misrepresent information. In these conditions, firms look to signals. One is development aid, because donors tend to give more to countries they trust to properly handle the funds. Our results show that aid seems to draw FDI – however, this is conditional on whether the aid can be considered geostrategically motivated. We also show that this effect decreases as time elapses after the conflict. This suggests that aid’s signaling effect is specific to low-information environments, and helps rule out alternative causal mechanisms linking aid and FDI.

Keywords: FDI, foreign aid, post-conflict, geoestrategic aid, civil war

Suggested Citation

Garriga, Ana Carolina and Phillips, Brian J., Foreign Aid as a Signal to Investors: Predicting FDI in Post-Conflict Countries (2012). Journal of Conflict Resolution March 2014 vol. 58 no. 2 280-306, Available at SSRN: https://ssrn.com/abstract=1452026

Ana Carolina Garriga (Contact Author)

University of Essex - Department of Government ( email )

Wivenhoe Park
Colchester CO4 3SQ, CO4 3SQ
United Kingdom

HOME PAGE: http://https://www.essex.ac.uk/people/garri79407/carolina-garriga

Brian J. Phillips

University of Essex - Department of Government ( email )

Wivenhoe Park
Colchester CO4 3SQ, CO4 3SQ
United Kingdom

Centro de Investigación y Docencia Económicas (CIDE) - Division of International Studies ( email )

Mexico City
Mexico

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