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Does foreign capital really matter for the host country agricultural production? Evidence from developing countries

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Abstract

Despite the high flow of foreign assistance and foreign direct investment (FDI) to developing countries, the potential of agricultural production remains low and stagnant. Accordingly, it is interesting to know how each type of foreign capital (FDI and foreign aid) affects the agricultural output? And what are the most effective forms of aid that increase agricultural production? The main objective of this study is to give answers to these equations using data for 50 developing countries over the 1995–2015 period. Our results indicate, first, that the effect of FDI only (without foreign aid) has a positive and significant effect on agricultural production. Second, we found that the four forms of foreign aids [notably social-infrastructure-aid (SIA), investment aid, non-investment-aid, agriculture–forestry–fishing-aid (AFFA)] have positive and significant effects on agricultural production. Finally, when we introduced both variables in the model, we found that FDI and two types of foreign aids (SIA and AFFA) have positive and significant effects on agricultural production. In conclusion, the synergies inherent between FDI, SIA, AFFA, increase twice the agricultural production.

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Fig. 1

Source: authors using data from WDI (2016), OECD-DAC CRS (2016)

Fig. 2

Source: authors using OECD-DAC CRS (2016)

Fig. 3

Source: authors using OECD-DAC CRS (2016)

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Notes

  1. In 2015, the Agenda 2030 for Sustainable Development adopted 17 Sustainable Development Goals (SDGs) and 169 global targets to improve people’s lives by 2030.

  2. https://data.worldbank.org/indicator/nv.agr.totl.zs?page=2.

  3. https://data.worldbank.org/indicator/SL.AGR.EMPL.ZS?locations=XM.

  4. Forum for Agricultural Research in Africa.

  5. World Economic Situation and Prospects.

  6. We considered the World Bank classification in 2016.

  7. The availability of data is one of the justifications behind choosing these periods.

  8. We used lagged FDI stock (in US$ per capita) to capture the effect of FDI on agricultural production in the years preceding the estimation period.

  9. Like the variable FDI stock, we used lagged sector-specific foreign aid (in millions US$) to capture the effect of sector-specific foreign aid on agricultural production in the years preceding the estimation period because aid spending on agriculture usually has long times to lead (Kaya et al. 2013). In order to select the appropriate lag for our model, we run the Vector Autoregressive model (VAR) through which we found that the FDI stock and sectoral aid will affect agricultural production after 3 years.

  10. Soil natural capital indicates the capacity of soil biodiversity to generate ecosystem services as a component of farm capital, and it is important for the stability and resilience of arable production systems (Cong et al. 2014).

  11. The Non-Profit Organization (NPO) is a small Spanish missionary institution called the Missionary Community of St. Paul the Apostle, which has been working mainly in Ethiopia, Kenya, Sudan, and Mexico for more than 25 years, with agriculture, nutrition and education projects. The purpose of NPO’aid program is building wells to provide enough water and food for families, so they can maintain vegetable gardens, where they can cultivate several crops.

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  1. Faculty of Economics and Management, University of Sfax, Sfax, Tunisia

    Sabrine Dhahri

  2. College of Business and Economics, Qassim University, Buraydah, Kingdom of Saudi Arabia

    Anis Omri

  3. Faculty of Economics and Management of Nabeul, University of Carthage, Carthage, Tunisia

    Anis Omri

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  1. Sabrine Dhahri
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Appendix

Appendix

See Tables 4, 5 and 6.

Table 4 Aids classifications and their principal index.
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Table 5 List of donor countries.
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Table 6 Sample of countries
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Dhahri, S., Omri, A. Does foreign capital really matter for the host country agricultural production? Evidence from developing countries. Rev World Econ 156, 153–181 (2020). https://doi.org/10.1007/s10290-019-00361-2

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