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

Garriga, Ana Carolina and Phillips, Brian J (2014) 'Foreign Aid as a Signal to Investors: Predicting FDI in Post-conflict Countries.' Journal of Conflict Resolution, 58 (2). 280 - 306. ISSN 0022-0027

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Abstract

Does development aid attract foreign direct investment (FDI) in post-conflict countries? This article 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.

Item Type: Article
Uncontrolled Keywords: aid, FDI, civil war, post-conflict, geostrategic aid
Subjects: J Political Science > JA Political science (General)
Divisions: Faculty of Social Sciences > Government, Department of
Depositing User: Elements
Date Deposited: 06 Jun 2019 10:09
Last Modified: 06 Jun 2019 10:15
URI: http://repository.essex.ac.uk/id/eprint/23374

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