Aid for Trade, export product diversification, and foreign direct investment

The few existing studies on the relationship between Aid for Trade (AfT) flows and inward foreign direct investment (FDI) tend to report a positive effect of total AfT flows, in particular of aid flows for building economic infrastructure, on FDI inflows. This article aims to complement these works by investigating whether the effect of AfT flows on inward FDI stock depends on recipient countries' level of export product concentration. Empirical analysis has shown that AfT flows exert a strong positive effect on inward FDI stock in countries that experience a high level of export product concentration. These findings are relevant for developing countries regarding the concentration of their export products on primary commodities and given the strong role of FDI flows for employment generation, economic growth, and development in these countries.