Foreign Aid, FDI and Economic Growth in South-East Asia and South Asia

We examine the interrelationship among foreign aid, foreign direct investment (FDI) and economic growth in South-East Asia (SEA) and South Asia (SA) during 1980–2016. The findings from alternative empirical estimations suggest that while foreign aid is negatively associated with FDI as well as growth, FDI positively influences growth. Further, governmental financial assistance to private sector for domestic investment turns out to be important in all empirical estimations insofar as positively associated with FDI flows as well as growth. We, therefore, infer that low-income SEA and SA economies should focus on channelizing governmental financial assistance to private sector for domestic investment, macroeconomic stabilization, trade openness, and efficient utilization of aid flows, in order to attract, absorb and reap the benefits of complementing FDI flows and sustaining higher economic growth.

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