The Relationship between Foreign aid and FDI in South Asian Economies

Abstract

This study investigates whether or not foreign aid attracts foreign direct investment (FDI) in South Asian economies. Using various econometric techniques, the investigation is performed based on the concept of substitutable and complementary relationship between FDI and classified foreign aid. Foreign aid classified into aid in the shape of physical capital, and aid for human capital and infrastructure development. The results suggest that both aid in the shape of physical capital and aid for human capital and infrastructure development serve as complementary factors to foreign direct investment rather than being substitutable in South Asian economies. Thus, we conclude that aid flow in South Asian countries attract FDI into the region.