What Explains FDI Flows to Latin America? A Pooled Analysis, 1980-2006
Abstract
This paper estimates a pooled (fixed-effects) FDI investment function that seeks to identify some of the major economic and institutional determinants of FDI flows to nine major Latin American countries during the 1980-2006 period. First, it develops a conceptual framework of analysis that seeks to identify some of the major economic and institutional determinants of FDI. Second, the paper gives an overview of FDI flows to Latin America during the 1990-2011 period, with particular emphasis on their contribution to the financing of gross capital formation. Third, an empirical model for FDI flows to Latin America is outlined and an economic rationale is provided for the included variables and their expected signs. Fourth, the estimates from a panel regression designed to explain the variation in FDI flows to Latin America during the 1980-2006 period suggests that market size (proxied by real GDP), credit provided by the private banking sector, government expenditures on education, the real exchange rate, and the level of economic freedom have a positive and significant effect. On the other hand, public investment spending, the debt-service ratio, and the volatility of the real exchange rate have a negative and significant effect on FDI flows. The panel unit root tests on the residuals of the relevant panel regressions also suggest that there is a stable, long-term relationship among the included variables; i.e., the selected variables in the reported regressions are cointegrated over the relevant time period. Finally, the paper summarizes the major findings and offers some policy prescriptions for attracting FDI flows to the region and enhancing their positive direct and indirect effects.
About this article
References
UNCTAD, World Investment Report 2012, New York: United Nations Conference on Trade and Development, 2012.
G. Bird, and R.S. Rajan, International Currency Taxation and Currency Stabilization Developing Countries, The Journal of Development Studies 37 (2001): 21-38.
Bosworth, B. P. and Collins, S.M. (1999). Capital Flows to Developing Economies: Implications for Savings and Investment, Brookings Papers on Economic Activity, No.1, 143-80.
A, Kumar, Does Foreign Direct Investment Help Emerging Economies? Economic Letter 2 (2007): 1-8.
J.A. Montecinos, and J. A. Cordero, Capital Controls and Monetary Policy in Developing Countries, Center for Economic and Policy Research, Washington, D.C., (April 2010): 1-33.
View more references (36)
E.S. Prasan and R.G. Rajan, A Pragmatic Approach to Capital Account Liberalization, 22 (2008): 149-172.
K. H. Zhang, Does FDI Promote Economic Growth? Evidence from East Asia and Latin America, Contemporary Economic Policy 19 (2001): 175-185.
M. Wang and M.C.S. Wong, What Drives Economic Growth? The Case of Cross-Border M&A and Greenfield FDI Activities, Kyklos 62 (2009): 316-330.
J. H. Dunning, J. H., International Production and the Multinational Enterprise, Allen & Unwin, Publishers, USA, 1981.
J. H. Dunning, J. H., Explaining International Production, London: Harper & Collins, 1988.
M. Mortimore, The Impact of TNC Strategies on Development in Latin America and the Caribbean, Published for Overseas Development Institute (UK), (2003): 1-23.
J.R. Markusen, Incorporating the Multinational Enterprise into the Theory of International Trade, Journal of Economic Perspectives 9 (1995): 169-189.
R. Aliber, A Theory of Direct Foreign Investment, in C.P. Kindleberger. C.P., ed., The International Corporation: A Symposium. Cambridge, MA: MIT Press, 1970.
J. M. Cypher, and J. L. Dietz, The Process of Economic Development, Routledge, USA, 2004.
M.D. Levi, International Finance, 4th ed., Routledge, USA, 2005.
H. J. Chang, Bad Samaritans, Bloomsbury Press, USA, 2008.
R. Ram and K.H. Zhang, Foreign Direct Investment and Economic Growth: Evidence from Cross-Country Data for the 1990s, Economic Development and Cultural Change 51 (2002): 205-215.
T.J. Yeager, Institutions, Transition Economies, and Economic Development, Westview Press, USA, 1999.
B. Ramasamy and M. Yeung, The European Union’s Foreign Direct Investment into Indonesia: Determinants and Threats, in H.S. Kehal, Foreign Direct Investment in Developing Countries, Palgrave Macmillan, Ltd., USA, 2004.
D.C. North, Institutions, Institutional Change and Economic Performance, Cambridge University Press, USA, 1990.
ECLAC, La Inversion Extranjera en America Latina y El Caribe, Santiago, Chile: United Nations, 1998.
L.R. De Mello, Jr., Foreign Direct Investment in Developing Countries and Growth: A Selective Survey, Journal of Development Studies 34 (1997): 1-34.
ECLAC, Economic Survey of Latin America and the Caribbean 2010-2011, Santiago, Chile: United Nations, 2012.
UNCTAD, World Investment Report 2007, New York: United Nations Conference on Trade and Development, 2007.
UNCTAD, World Investment Report 1999, New York: United Nations Conference on Trade and Development, 1999.
D. Green, Silent Revolution, New York, Monthly Review Press, 2003.
M.R. Agosin, Foreign Direct Investment in Latin America, Inter-American Development Bank, USA, 1995.
J.E. Stiglitz, J. E. (2003). Whither Reform? Towards a New Agenda for Latin America, Cepal Review 80 (2003): 7-38.
M. Bloomstrom, and E.Wolff, Multinational Corporations and Productivity Convergence in Mexico, in W. Baumol, R. Nelson, and E. Wolff, eds., Convergence of Productivity: Cross-National Studies and Historical Evidence. Oxford: Oxford University Press, 1994.
A. Chowdhury, and G. Mavrotas, FDI and Growth: What Causes What? World Economy 29 (2006): 9-19.
M.D. Ramirez, Did Institutional Factors Enhance FDI Flows to Chile During the 1985-2001 Period? A Cointegration Analysis, Journal of Emerging Markets 10 (2005): 18-29.
K. Vadlamannati, and A. Tamazian, Growth Effects of Foreign Direct Investment and Economic Policy Reforms in Latin America, MPRA Paper No. 14133, 2009.
S. Devarajan and H. Zou, Does Public Investment Promote Economic Growth? Working Paper No. 95-9, The Hong Kong University of Science and Technology (1994): 1-27.
S.S. Everhart, and M.A. Sumlinski, Trends in Private Investment in Developing Countries: Statistics for 1970-2000, International Finance Corporation, 44, The World Bank, USA, 2001.
Levin, A., Lin, C.F., and Chu, C. (2002). Unit Root Tests in Panel Data: Asymptotic and Finite-Sample Properties, Journal of Econometrics, 108, 1-24.
J. Breitung, The Local Power of Some Unit Root Tests for Panel Data, in B. Baltagi, ed., Advances in Econometrics, Vol. 15: Non-stationary Panels, Panel Cointegration, and Dynamic Panels. Amsterdam: JAI Press, 2000.
K. Hadri, K., Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root in Panel Data with Serially Correlated Errors, Manuscript, Department of Economics and Accounting, University of Liverpool, 1999.
P. Pedroni, Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors, Working Paper, Indiana University (1999): 1-19. Subsequently published in Oxford Bulletin of Economics and Statistics, 61, Special Issue.
K.S. Im, M.H. Pesaran, and Y. Shin, Testing for Unit Roots in Heterogeneous Panels, Journal of Econometrics 115 (2003): 53-74.
B. H. Baltagi, Econometric Analysis of Panel Data, 2nd ed., John Wiley & Sons, LTD., USA, 2001.
G.S. Maddala, and S.Wu,. A Comparative Study of Unit Root Tests with Panel Data and A New Simple Test, Oxford Bulletin of Economics and Statistics 61 (1999): 631-52.