Capital Mobility, Foreign Aid, and Openness: A Reappraisal

Payne and Kumazawa (2005) examine the effect of domestic savings, foreign aid, the evolution of capital mobility over time, and openness on investment rates using a panel of sub-Saharan African countries. They find that capital mobility has increased over time and that foreign aid and openness positively impact investment. We extend their work by accounting for business cycle effects and endogeneity issues. Accounting for these factors does not qualitatively change their findings except that we find a substantially larger impact of foreign aid in supporting domestic investment.