Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/336810 
Year of Publication: 
2026
Series/Report no.: 
University of Göttingen Working Paper in Economics No. 440
Publisher: 
University of Göttingen, Department of Economics, Göttingen
Abstract: 
This study analyzes the empirical link between German bilateral development finance and Foreign Direct Investment (FDI) at the sub-national (ADM2) level. We construct a unique dataset by merging geo-referenced development aid projects - implemented by KfW Development Bank - over more than two decades with FDI project data. The analysis investigates four research hypotheses, and finds that: (i) development finance activity is positively and significantly associated with FDI inflows; (ii) the positive link is similarly pronounced in both hard and soft sectors; as well as (iii) irrespective of recipient countries' income level; and (iv) the positive aid-FDI association appears to be driven by projects with stronger implementation, as measured by higher ex-post evaluation ratings. For these higher-rated projects, KfW aid is significantly more likely to be associated with FDI from Germany and the EU. Our findings suggest that FDI may be an important channel through which development aid simultaneously benefits both recipient - by providing capital and technology - and donor countries, by signaling investment opportunities for its enterprises.
Subjects: 
Development aid
development finance
FDI
JEL: 
F23
F35
O12
O18
Document Type: 
Working Paper

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