Paving Their Own Road? Local Chinese and World Bank Aid and Foreign Direct Investment in Africa

Abstract

Abstract China’s emergence as a major donor and economic partner to sub-Saharan Africa has prompted questions if the aims and impacts of China’s efforts in the region are driven by self-serving commercial motives. While there are strong reasons to think that the foreign aid may make a location more attractive to investment, generally, by improving the infrastructural, institutional, or human capital environment and/or by serving as a signal of a location’s risk, there is also reason to suspect that Chinese aid may be “paving the way” for investment by Chinese firms. To investigate, this paper uses spatial and temporal variations in localized, geo-referenced data to find a strong overall support that local aid boosts local foreign direct investment (FDI). However, we also find some evidence that Chinese aid boosts its own FDI compared to FDI from third-party countries; but this differential effect is also visible with the Chinese FDI’s response to the World Bank aid as well as in the relationship between both aid and FDI from the USA, suggesting that the Chinese FDI may simply be following any aid and that the relationship between its aid and FDI is not exceptional among bilateral donors.