The Effect Of Host Country Corruption And Development Aid On Foreign Direct Investment

Under the severe political corruption of African countries,the rapid increasing aid and OFDI to Africa urgently calls for a comprehensive interpretation and empirical test about the effectiveness of aid.Adopting the panel data of 47 African countries from the year of 2002 to 2013,and using the system GMM method and 2SLS approach,this paper empirically examines the direct effect and interaction effect of host countries corruption and China’s aid on China’s outward foreign direct investment.The results show that the corruption of African countries “sand the wheels” of China’s OFDI;China’s aid to Africa has significant direct improvement effect on China’s OFDI through “information effect”,“vanguard effect” and “infrastructure effect” especially for the economic infrastructure aid;When a good business environment is absent from host country,aid to host countries is equal to a quasi-government guarantee for multinational enterprises which can mitigate the adverse effects of investment risks from host country corruption on OFDI,and this moderating effect is involved in the economic infrastructure aid.However,aid’s direct effect and moderating effect for production department and other departments are not obvious.The above conclusions are still robust in Sub-Sahara sample,count data FDI as explanatory variables and 2SLS approach.Whereas China’s aid to Africa is conditional effective,it will be effective for aid that allocating economic and social infrastructure aid to the much more severe corruption countries and regions.In addition,Chinese government should strengthen aid policies communication with African countries and accelerate the combination of aid policy with investment policy and trade policy to minimize the adverse effects of corruption on OFDI in host countries,which will ensure that China’s aid and OFDI have an effective and excellent development prospect.