The impact of foreign aid on Foreign Direct Investment (FDI) inflows in developing Asian countries: Policy implications for Vietnam

Abstract

Foreign aid is vital in providing capital to Asian developing countries, allowing them to prioritize infrastructure development that supports poverty alleviation and economic growth. Likewise, Foreign Direct Investment (FDI) brings capital and advanced technology, driving economic expansion. Does foreign aid affect FDI inflows? Using one-step and two-step difference GMM estimators, it examines the effects of foreign aid on FDI inflows in 31 Asian developing countries from 2002 through 2023. The findings indicate that foreign aid negatively influences FDI inflows. Additionally, trade openness and infrastructure enhance FDI inflows, whereas market size and inflation have a negative impact. These insights provide valuable guidance for policymakers seeking to attract foreign aid and more FDI inflows to foster economic development.