Does official development assistance benefit the donor economy? New evidence from Japanese overseas infrastructure projects

Abstract

Given the growing pressure on donors to curtail foreign aid budgets, analyzing the effectiveness of bilateral official development assistance (ODA) in realizing national interests has become more significant than ever. From the viewpoint of economic interests, prior research has revealed that ODA can help expand donor exports and outward foreign direct investments. This study provides evidence that ODA can also help firms from donor countries to win infrastructure projects in recipient countries. Employing unique contract data on Japanese overseas infrastructure projects, I estimate a fixed effects Poisson model with a panel dataset for 158 recipients for the period between 1970 and 2020. The results suggest that 17% of the total number of overseas infrastructure projects contracted to Japanese firms during 1970-2020 were attributable to Japanese ODA disbursement. I also explore the potential mechanism, finding that the Japanese ODA-infrastructure link is strengthened when Japanese loans and grants are simultaneously provided to a recipient country. This finding is consistent with the view that pre-investment studies conducted as part of technical cooperation could generate goodwill effects on Japanese firms during their bidding for Japanese yen loan projects.