The notion that foreign aid and foreign direct investment (FDI) are complementary sources of capital is conventional among governments and international cooperation agencies. This paper argues that the notion is incomplete. Within the framework of an open economy Solow model we show that the...

We examine the idea that aid and foreign direct investment (FDI) are complementary sources of foreign capital. We argue that the relationship between aid and FDI is theoretically ambiguous: aid raises the marginal productivity of capital when used to finance complementary inputs (like public...