Aid, Trade and Foreign Direct Investment

Aid for Trade (AfT), with the purpose of facilitating exports, imports and foreign direct investments (FDI), has become a major part of the foreign aid distribution. AfT aims to improve the performance of developing countries in harnessing the benefits from international trade. The integration into international markets and the inflow of FDI is associated with welfare gains and economic growth for developing countries (Banerjee and Duflo, 2005; Melitz and Ottaviano, 2008; Borensztein et al, 1998). Foreign aid, in particular in trade related needs, has the potential to alleviate the lack of net capital flows to less developed countries, to reduce severe supply-side constraints, to improving market environments and to facilitate participation of developing countries in international trade. Only a few authors so far have exploit the link between AfT, trade and FDI. My dissertation wants to fill this gap. I empirically show that AfT increases trade with donor countries but as well with other developing countries. Further, aid targeted at infrastructure needs helps to remove obstacles of foreign investors related to transportation, communication, financial and energy-related infrastructure. A higher inflow of FDI is associated with higher technology and knowledge spillovers and higher product-level dynamic which are important drivers of productivity growth and economic development