Foreign aid modalities and MNEs’ investments

Growing interest in leveraging foreign aid to mobilize private capital has led to a shift in aid policy from traditional grants toward financial instruments such as loans and equity investments (non-grant aid). Yet, we have a limited understanding of how different aid modalities relate to firm-level investment behavior. This study examines how bilateral aid is associated with firms’ international investment, distinguishing between grant and non-grant aid. Using data on greenfield investments from firms in 30 OECD donor countries over the 2003–2020 period, we analyze firms’ decisions to invest and investment scale measured through the number of projects, jobs created, and capital investment. We find that bilateral aid, particularly non-grant aid, is positively associated with investment decisions, project numbers, and job creation. These findings highlight the importance of aid policy design in shaping firm investment and provide new firm-level evidence on the aid–investment relationship. By linking aid modalities to firm investment across multiple countries and outcomes, this study contributes to research on development finance and informs policy debates on how the design of aid relates to private sector participation in development, particularly in the context of ongoing changes in the global aid landscape.