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Foreign Direct Investment vs. Official Development Assistance: The Battle is On!

It is impossible not to notice that foreign direct investment is fast outstripping aid to some of the world’s poorest countries. What does this mean for the economic growth of these countries? Does this spell the end of aid? Or is it all hype? Building Markets is running a research programme over the summer to dig up, turnover and debate the evidence. Each week we will be publishing a blog with our latest findings and inviting you to take part in the debate.

Have you ever questioned whether international aid, the mo’ money strategy to development, is producing the best possible outcomes in developing countries? Whether there are better ways of harnessing the power of money to benefit the Global South? So have we! And for this reason, Building Markets is launching a research project to investigate the impacts of the two dominant sources of international capital (money) in Africa, foreign direct investment (FDI) and official development assistance (ODA). The project will focus on FDI in the extractive industry (i.e. mining, petroleum, etc.) and will consider the immediate impacts of extractive operations in host countries and regions.

Both the ODA and FDI sectors have received a smorgasbord of feedback regarding their impacts in African countries [1] [2] [3] [4]. These comments have fueled incessant international debate regarding how capital can be leveraged to promote development. Unfortunately, in many cases, these debates have failed to agree upon a concrete strategy that can improve the livelihoods of the impoverished. Given that over 80% of the world’s population lives in developing countries, this state of affairs must change [5]. It is essential to determine a clear path between developing and developed. And though we have not agreed upon how capital can expedite this process, it is certain that it will play an important role.

Capital flows into Africa have undergone dramatic changes over the past decade. Traditionally, ODA has been the primary source of international capital into African nations. However, over the past five years, FDI inflows have begun to overtake ODA (see Table 1). This FDI is significantly concentrated in the extractive sector and has important impacts on host populations. For instance, research has shown that FDI can help stimulate local economies, create jobs, and even build infrastructure [6] [7] [8]. Currently, the full extent of these impacts is not completely understood. Furthermore, the relative impact of FDI compared to ODA has not been measured. As international capital flows continue to shift, understanding the differences between how FDI and ODA affect host countries will be of critical importance. Such an understanding can help decision-makers leverage capital flows in order to maximize positive effects and minimize negative effects.

Though Building Markets does not presume to offer a magical solution to development, it will attempt to determine where the greatest dividends can be extracted from international capital flows. Over the course of the summer, Building Markets will investigate and compare the impacts caused by FDI and ODA in the hopes of determining the most effective drivers of positive change and the most destructive forces of negative change. We will be digging deep into the evidence, turning it over and starting a few debates along the way. We would also like to offer a call to action. If you are interested in this innovative field and have any relevant information or research, please do not be shy, contact Mikayla Wicks, who is spending her summer off from her Masters of Global Affairs researching this topic for Building Markets, at!

[1] Rees, Edward. “Banditry in the US Congress? USAID vs. Contractors.” Building Markets Blog. 8 May 2012. Web. <>.

[2] Johnson-Sirleaf, Ellen, and Nicky Oppenheimer. “Aid Is Good, Business Is Better.” The New York Times. The New York Times, 29 Aug. 2008. Web. <>.

[3] Shanta. “Why Aid to Africa Must Increase.” World Bank, 25 May 2009. Web. <>.

[4] “FDI – Exploitation of Labor.” Economy Watch – Follow The Money. 30 June 2010. Web. <>.

[5] World Bank. “DEPweb: Beyond Economic Growth, Glossary.” Web. <>.

[6] The Mining Industry in West Africa. Increasing Local Procurement By the Mining Industry in West Africa. Rep. no. 66585-AFR. World Bank, 2012. Print. P 4.

[7] “Ghana Case Study: The Challenge of Mineral Wealth: Using Resource Endowments to Foster Sustainable Development.” International Council on Mining and Metals (2007). Print. P 45.

[8] The Mining Industry in West Africa, “Increased Local Procurement,” P 9.

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