This study re-examined the effect of official development assistance (ODA) of five major donor countries (France, Germany, Japan, the United Kingdom, and the United States) on foreign direct investment (FDI) using panel data from 2003 to 2020. In addition to the system Generalized Method of Moments (GMM) with the gravity model, the Granger causality test and impulse response analysis with the panel VAR model was conducted. It was concluded that ODA did not necessarily have an effect on FDI since the 2000s. It is also suggested that the vanguard effect of Japanese ODA, as indicated by some previous studies, appeared mainly in the 1990s and may not be sustainable. The novelty of this study is to verify the effects of the ODA of major donors on FDI using new data from the 2000s onward, especially to reveal that the vanguard effect of Japanese ODA has not been observed since the 2000s. A limitation of this study is to determine only the presence or absence of a general trend at a statistically significant level. Therefore, further research on individual cases is expected to find how ODA has affected the investment decisions of individual companies.

This study examined the impact of Official Development Assistance (ODA) on Foreign Direct Investment (FDI) by aid type, which has been largely overlooked in previous studies. Using the Generalized Method of Moments with a gravity model, five major donor countries (France, Germany, Japan, the United Kingdom, and the United States) and 63 recipient country pairs from 1996 to 2020 were analyzed. Granger causality tests, impulse response analyses and variance decomposition analyses using a panel vector autoregressive model were conducted to identify causal relationships in the time series and to quantitatively capture the impact. The results suggest that ODA Loans from Germany, Japan, and the United Kingdom promote FDI. Their ODA Loans have a high proportion of economic infrastructure and productive-sector support. Hence, their ODA Loans may attract FDI to recipient countries by developing infrastructure in recipient countries such as transportation, telecommunications, energy, and finance. This study contributes to an academic community by highlighting the differences of aid type in attracting FDI and provides practical implications for policymakers and practitioners in the field of international development.