Who gives foreign aid to whom and why?

This paper studies the pattern of allocation of foreign aid from various do nors to receiving countries. We find considerable evidence that the directi on of foreign aid is dictated as much by political and strategic considerat ions, as by the economic needs and policy performance of the recipients. Co lonial past and political alliances are major determinants of foreign aid. At the margin, however, countries that democratize receive more aid, ceteri s paribus. While foreign aid flows respond to political variables, foreign direct investments are more sensitive to economic incentives, particularly "good policies" and protection of property rights in the receiving countrie s. We also uncover significant differences in the behavior of different don ors.