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Is Foreign Direct Investment Productive in the Latin America Case? A Panel Co-integration Analysis, 1980-2002

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This article estimates whether FDI flows—and other relevant variables—have had a positive and significant effect on Latin America's private investment spending over the 1980-2002 period. It is one of the first empirical studies to investigate the complementarity hypothesis between domestic private investment and FDI flows using recently developed panel unit root and panel co-integration analysis for the period in question. The article also addresses the important issue of whether changes in the real exchange rate (expenditure-switching policies) have a contractionary effect on the economies of Latin America. The results suggest that (lagged) gross FDI, public investment spending, and real credit to the private sector have a positive and significant effect on private capital formation, while lagged changes in the real exchange rate, particularly its volatility, as measured by the period standard deviation, have a negative effect. The article also finds that net FDI flows (a variable which deducts repatriation of profits and dividends) remain significant but their impact is reduced by more than half relative to their gross FDI counterpart.
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Keywords: Foreign Direct Investment; Fully Modified Ordinary Least Squares (FMOLS); Latin America; panel co-integration test; panel unit roots

Document Type: Research Article

Affiliations: Department of Economics, Trinity College, Hartford, Connecticut, USA

Publication date: January 1, 2011

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