No general view exists with regard to the relationship between inflows of official development assistance (ODA) and inflows of foreign direct investment (FDI). For aid-giving countries, the benefits of promoting the influx of FDI to recipient countries are significant. Moreover, the merits for recipient countries are also considerable, and have the potential to lead to economic development through the advancement of infrastructure development and the resolution of domestic savings shortfalls in the form of ODA and FDI. Against this background, in this paper, I would like to verify whether inflows of ODA to developing countries have the effect of promoting inflows of FDI from donor countries to recipient countries. In the paper, I have carried out a comparative analysis of Japan and China using cross-sectional data consisting of the respective average values for Japan and 46 developing countries, as well as China and 44 developing countries for the ten-year period from 2003 to 2012. The paper’s main conclusion is that whereas Japanese ODA has had the positive effect of promoting inflows of FDI from Japan to recipient countries, no corresponding effect is evident with respect to Chinese ODA. The policy implications of these results are that inflows of FDI are a factor in forming incentives for sustaining aid over the long-term in aid-giving countries. Sustaining this incentive may be considered to be an important factor in ensuring the existence of a win-win relationship between aid-giving countries and recipient countries.
Tamkang Journal of International Affairs 22(1), p.39-68