How does Foreign Aid Enhance Developing Countries’ Export Varieties?: The Role of Human Capital and Institutional Qualities

초록

As developing countries suffer from severe export concentration, foreign aid seeks to diversify exports rather than increase exports and trade volume. This study investigated the effects of foreign aid on export product diversification and examined how the effect changes according to the rate of tertiary education enrollment and institutional quality in the recipient countries. An analysis of country pairs consisting of 25 donors and 124 recipients from 1988 to 2020 revealed that foreign aid generally positively impacts export diversification in recipient countries with high tertiary education rates and institutional quality. It showed that a high rate of tertiary education enrollment and high institutional quality are vital for increasing the effect of foreign aid on export product variety in recipient countries. Specifically, among the six measures of institutional quality used, five were positive and statistically significant for the effect of foreign aid on the variety of export products. Interestingly, institutional quality played a more significant role in foreign aid effectiveness, especially when foreign aid is delivered to recipient countries with relatively low tertiary education enrollment rates. This finding highlights the significance of implementing foreign aid for the purpose of achieving economic growth through export diversification, while considering the institutional and educational factors of recipient countries.

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