1.3 Literature Review
The literature that looks into the underlying factors of the East Asian countries’
foreign aid can be classified into two major categories: One is research concerning the relationship between foreign aid and foreign direct investment (FDI) in economic terms. The other focuses on China’s or Korea’s foreign aid based on the country’s individual characteristics from the perspective of political economy. We briefly survey these two strands of research below.
1.3.1 General Relationship between foreign aid and FDI
Controversies arise in the academic arena about whether or not foreign aid from a donor country tends to promote FDI from the same donor to the recipient country (the so-called vanguard effect).23 Even advanced economies such as the United States (US) and Japan state that a reciprocal economic relation between aid and FDI would help the economies of developing countries24, but whether or not a direct relation exists between these two economic activities is ambiguous because some multiple channels could affect the vanguard effect. For instance, foreign aid can increase the donor country’s FDI by improving the recipient country’s socio-economic infrastructure (infrastructural effect) and enhancing the economic capability of the developing countries to finance outflows from FDI (financing effect).25 However, there are also some negative factors that hamper the vanguard effect. In these cases, foreign aid might not only encourage some major actors of the recipient country to
23 Kimura, Hidemi and Todo, Yasuyuki (2010), “Is Foreign Aid a Vanguard of Foreign Direct Investment? A Gravity-Equation Approach”, World Development, 38(4), 482.
24 Ibid.
25 Ibid.
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seek rent (rent-seeking effect) but also distort the resource allocations between economic sectors (Dutch-disease effect) and thus make investors from the rich country hesitate before investing more in the partner country26.
Blaise (2005) focuses on Japan’s foreign aid case in China. He argues that Japan’s aid flow promoted its own FDI inflows at the provincial level of the PRC through a conditional logit model which was used in empirical studies of location choice from 1980 to 1999.27 Kimura and Todo (2010) made an international comparison between Japan and other donor countries such as the US, the United Kingdom (UK) and France. They concluded that Japan’s aid has a positive and significant effect on its FDI, while this correlation was not significant for any of the western countries.28 To explain these statistical results, they assumed that the Japanese government’s close coordination with private sectors in conducting its foreign aid has something to do with Japan’s unique case.29 Kang, Lee, and Park (2010) compared Korea’s vanguard effect with Japan’s past case. They indicated that the current manner of Korea’s foreign aid has largely followed in the footsteps of Japan’s and Korea’s foreign aid by type (grants or loans), region, and income level of recipient countries.30 The authors also draw a conclusion that at the very least these two countries’ foreign aid can lead to an increase in foreign investment flows.31
26 Ibid.
27 Blaise, Severine (2005), “On the Link between Japanese ODA and FDI in China: a Microeconomic Evaluation using Conditional Logit Analysis”, Applied Economics, 37(1), 51.
28 Kimura and Todo (2010), op cit., 491.
29 Kimura and Todo (2010), op cit., 492.
30 Kang, Sung Jin, Lee, Hongshik, and Park, Bokyeong (2010), “Does Korea follow Japan in foreign aid? Relationships between aid and foreign investment”, Japan and the World Economy, 3.
31 Kang et al., (2010), op cit., 9.
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Sanfilippo (2010) conducts research on China’s FDI to the African continent. The author assumes that Chinese outward FDI to Africa is a function of Gross National Income (GNI), trade volume with China, debt risk of the recipient countries and so on.
After operating his statistical model, he concludes that Chinese FDI to Africa is driven by its energy demand and the market potential of partners.32 Zhang, Yuan, and Kong (2010) focus on relationships between Chinese foreign aid and FDI in terms of gross African continent. They test whether or not the PRC’s foreign aid and FDI have complementary relations and draw a conclusion that Beijing’s aid has had a tendency to lead to more FDI outflows to Africa, but recently, China has started to substitute its aid with its FDI in Africa.33
1.3.2 China and South Korea’s foreign aid to Africa
1.3.2.1 Determining factors affecting China’s foreign aid to Africa
In spite of the difficulties that exist in accessing the official statistics of China’s foreign aid, research on Chinese foreign aid policy has been burgeoning in recent years.34 Researchers have discussed some of the factors affecting Chinese foreign aid policy. Humanitarian demands from underdeveloped African countries that result from natural disasters or political turmoil would be one of the basic considerations.
32 Sanfilippo, Marco (2010), “Chinese FDI to Africa: What Is the Nexus with Foreign Economic Cooperation? ”, African Development Review, 22(S1), 610.
33 张汉林，袁 佳，孔 洋（2010）, “中国对非洲 ODA 与 FDI 关联度研究(A Study on the Linkage between China’s ODA andFDI to Africa) ”，世界经济研究，2010 年 第 11 期 (Serial No. 201)，73.
34 For example, there are a number of books and journals available such as China’s African Challenges written by Raine, Sarah (2009), China Safari: On the trail of Beijing’s Expansion in Africa written by Michel, Serge and Beuret, Michel (2009), and China into Africa: Trade, Aid and Influence edited by Rotberg, Robert I. (2008).
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For instance, Brautigam (2009) indicates that China does make use of the Red Cross to provide humanitarian aid in natural disasters in Africa.35
Political factors also cannot be ignored because the African continent has many countries and therefore, exerts a big influence on the international community.36 Davies, Martyn (2008) represents this position. When he selected the case of Chinese foreign aid with Ethiopia, he mentioned that Ethiopia has been critical for China because this country was not only the previous African chair of the Forum on China-Africa Cooperation (FOCAC), but also the headquarters of the African Union and one of its most populated countries.37 In this sense, some scholars indicate that China tends to pay more attention to countries which have big voices among African countries.
Economic factors certainly make up a serious consideration in foreign aid policy. As the Chinese economy has grown rapidly, economic cooperation between China and African countries has increased congruently.38 For example, the supply of natural resources from Africa has been playing a role in driving China’s economy. Hurst, Cindy (2006) champions this view by arguing that Beijing has put their energy security ahead of everything else in Africa to meet its domestic industrial and
35 Brautigm (2009), op cit., 66.
36 For example, African countries consist of a quarter of the total 192 member states. Source:
http://www.un.org/en/members/growth.shtml#2000 (accessed on May 22, 2011)
37 Davies, Martyn (2008), “How China delivers development assistance to Africa, Center for Chinese Studies”, University of Stellenbosch, 8.
38 China is African continent’s largest trading partner in 2009. Source:
http://english.cntv.cn/program/bizasia/20101015/101588.shtml (accessed on Feb 13, 2011)
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consumer needs.39 Stable energy supply is a central artery of the Chinese economy in terms of sustaining rapid industrialization and improving people’s living standards.40
Regarding the energy supply factors which have affected China’s foreign aid policy, there are two different points of view on whether or not energy demand is the major determinant on the volume of Chinese foreign aid to Africa. The first view purports to an energy-savvy aid policy. In this vein, Lagerkvist, Johan (2009) criticized China for using a ‘‘no-strings-attached’’ foreign aid policy to stabilize its supply of natural resources from authoritarian regimes in Africa.41 Schiere, Richard (2010) warns that the unfair situation of Chinese aid style of free-ride would lend support to energy abundant dictatorships.42 Woods, Ngaire (2008) also indicates that China has written off total debts of some 2.13 billion USD for 44 countries including 31 African countries in doing just that.43
The other position is more cautious and less judgmental with regards to the direct and close relationship between African countries which have abundant natural resources such as crude oil, natural gas and the volume of foreign aid of China. Brautigam (2009) is the representative scholar supporting this stance. While acknowledging the
39 Hurst, Cindy (2006), “China’s Oil Rush in Africa”, the Institute for the Analysis of Global Security (IAGS), 16.
40 This tendency has become more strengthened since China become a net-importer since the mid 1990s.
41 Lagerkvist, Johan (2009), “Chinese eyes on Africa: Authoritarian flexibility versus democratic governance”, Journal of Contemporary African Studies, 27(2), 119-134.
42 Schiere, Richard (2010), “Building Complementarities in Africa between Different Development Cooperation Modalities of Traditional Development Partners and China”, African Development Review, 22(s1), 615-628.
43 Woods, Ngaire (2008), “Whose aid? Whose influence? China, emerging donors and the silent revolution in development assistance”, International affairs, 84(6), 1209.
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Chinese growing energy demand and the effort to secure energy supply, the author makes the point that it does not necessarily imply that Beijing’s foreign aid policy toward African countries is the means to attain such a goal.44 According to her argument, if we define foreign aid narrowly such as ODA, many of the Chinese international development activities cannot be classified as foreign aid. From this perspective, the author argues that there is no direct relationship between these two activities.
1.3.2.2 Determining factors that affect South Korea’s foreign aid to Africa
Despite the relative ease in having access to details from the Korean side, ironically, research on Korean foreign aid is not too well developed. The lack of attention may be due to the relatively short history and small amount of Korean aid. There are some official publications which introduce Korean aid accomplishments through its 20-year long history.45 They point out that Korea has tried to strike a balance between its responsibility toward the international community and the necessity to keep its economy going.46 Brautigm (2008b) also briefly mentions the Korean case to make an analogy with that of China.47 She, however, does not enter into any details. Kang et al. (2010) recently published an academic paper that deals with the comparison between Japan and Korea’s ODA, and their FDIs to developing countries.48
44 Brautigam (2009), op cit., 3.
45 Economic Development Cooperation Fund 20 Years published by Ministry of Finance and Economy (currently Ministry of Strategy and Finace) and the Korean Exim Bank in 2007 is the example.
46 Economic Development Cooperation Fund 20 Years, 36-37.
47 Brautigam, Deborah (2008b), “China’s African Aid: Transatlantic Challenges”, The German Marshall Fund of the United States, 23.
48 Kang et al. (2010), op cit., 1-9.
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Considering the rapidly growing trend, Korean aid will inevitably be put in the spotlight soon and this research can be a stepping-stone for advanced studies in the near future.
Korea also has various factors to take into consideration when it makes a decision on its foreign aid policy. Seoul certainly will contemplate about the distributional weights put on humanitarian demands49 arising from natural catastrophes or political unrest, the strategic importance of certain countries, and the economic relationships between Korea and her partners. Among these many possibilities, we are going to place more emphasis on the economic aspect. There are some criticisms leveled on new emerging donors in terms of the purpose of their aid toward less-developed countries. These commentators argue that developing countries have a strong tendency to make use of their foreign aid as leverage for their FDI or own exports tied with donor’s products and technology.