Foreign Aid and Foreign Direct Investment Protection

• In Event: Money, Motives, and Foreign Policy

Abstract

How do rich donors protect their outward foreign direct investment? We propose that donors use their foreign aid policy as a strategic tool to discourage host countries from expropriating their outbound investment. Rich donors protect their firms abroad by reducing aid to a recipient that expropriated the foreign investment of their firms. Using bilateral expropriation data from 1995 to 2014, we find that donors reduce aid flows in response to recipients' expropriation of their firms. This finding is consistent with the literature showing that aid is a strategic foreign policy tool.

Authors

• Seung-Uk Huh, St. Mary's College of Maryland

• Miles D. Williams, Denison University