In the long run, foreign aid does not contribute to growth. It has a greater tendency to create a culture of dependency among the recipient countries unless it is well planned, implemented and targeted in areas that would be most benefited to economic development in the recipient countries. If the aids are not targeting physical and institutional infrastructure, they are most likely not contributing to growth. Attached below is an article on the this topic.

From your description, if you find significance with one IV and that significance level changes when another IV is added, it means that there might be interaction effect among IVs. The findings of the first IV may be faulty findings since economic growth does not depend on one factor, but on many factors.

What time period do you aim to study?

The number of foreign aids is important to specify the suitable method. If your data cover a period of over 40 years, I think time series analysis appropriates for your research.

I think you may be going to it the wrong way: first literature on the growing with debt is clear and works through capital accumulation, second in debt distress situation, the effects starts with the effect on investment, since the debt overhang literatures shows that the market acquires a waiting option and this is before it affects growth. Empirical estimation can thus be trick for a single country and the observations are few. But what are you estimating and why do you expect significance?

The properties of the data will let you know that which econometric tool will be appropriate for analysis, if you are dealing with macro economic time series, then the most suitable method/tool is co-integration.

Dear Vathanak.

You'r data set will determine the appropriate Econometric technique for analysis. Also the duration of time your data will cover.

Regards

Hi Vathanak:

There are several ways to answer your questions. Also, it would really be nice if you tell us what the variables are, in order to better understand what you are asking. Anyway, first, I'm going to assume the left-hand-side variable is the growth rate of real GDP or real GDP per capita, and the right-hand-variables are 1) some measure of physical capital per worker (or per capita); and 2) a measure of foreign aid (or foreign aid per capita). Let's say you regress growth rate of real GDP per capital on physical capital per capita and found statistically significant result. This is to be expected. Next, let's say you add foreign aid per capita and found only one variable is statistically significant. The answer to your question will depend on which variable is statistically significant, which you did not say. If the foreign aid per capita variable is statistically insignificant, then the interpretation of the regression result will be straight forward. But, I suspect this is not the case. So, suppose (as I suspect) it is the physical capital per capita variable which is no longer statistically significant, how, then should one interpret the regression result?

As someone has already mentioned, for foreign aid to impact on economic growth, it will have to be infrastructure in nature, and not consumption in nature. If so, including physical capital per capita and foreign aid per capita will cause multicollinearity issue with the regression, which is not surprising, causing one of the variables to be no longer statistically significant.

Let me give you a simple but rather extreme example. Suppose the foreign aid is in the form of laptop computers, and laptop computers are included in the measure of physical capital per capita. Foreign aid per capita and physical capital per capita will be highly correlated. In fact, foreign aid per capita is a redundant variable and can be dropped from the regression.

As someone also mentioned, economic growth is a complex issue and your specification of the regression appears to be missing some other key variables, such as a measure of human capital, such as educational levels, some measure of technological growth, population growth, and perhaps a lagged growth rate of real GDP per capita to capture convergent effect. There is an an enormous literature on growth empirics which you can consult.

Finally, it should be pointed out that you should be careful about how you express your variables. Usually, to prevent issues with non-stationary variables, per capita measurement is necessary, whenever possible.

I hope this helps. Good luck with your research.