Does new donors' aid affect gross exports and GVC participation differently?

Abstract

This paper investigates whether new donors use foreign aid to facilitate their integration in the world economy. With this aim, the effect of foreign aid on gross trade and global value chains (GVC) is estimated for a sample of 12 new donors and 130 recipients over the period from 2000 to 2014. The results from a theoretically justified gravity model show that the aid effects are heterogeneous across donors and, although weak in the short run for GVC, they are however sizable in the long run. Foreign aid has a positive impact on gross trade for all donors, but only for some of them on the length of GVC. In particular, aid provided by Czech Republic, Hungary, Poland, Korea, Thailand and Turkey fosters the two forms of internationalization, whereas aid given by Russia and Israel only affects gross exports. Surprisingly, the magnitude of the aid effects is smaller for China than for other donors.