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Does Foreign Direct Investment Enhance Labor Productivity Growth in Chile? A Cointegration Analysis

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Author Info
Miguel D. Ramirez () (Department of Economics, Trinity College)

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Abstract

This paper examines the impact of foreign direct investment (FDI) on labor productivity growth in Chile. After a critical review of the Chilean experience with FDI flows during the 1990s, the paper presents a simple growth model that explicitly incorporates any positive (negative) externalities generated by additions to the foreign capital stock. Using cointegration analysis, the article estimates a dynamic labor productivity function for the 1960-2000 period that includes, inter alia, the impact of changes in the stock of foreign and public capital. The error correction model (ECM) estimates suggest that increases in both public (lagged) and foreign (lagged) investment have a positive and economically significant effect on the rate of labor productivity growth. The error correction terms of the estimated model are negative and statistically significant, thus suggesting that deviations of actual labor productivity from its long-run value are corrected in subsequent periods. The article also reports historical simulations from the estimated ECMs that show that the models are able to track the movements in the actual series. Finally, the paper offers some cautionary observations with regard to the role of FDI flows in promoting capital formation and labor productivity growth in Chile.

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Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

Volume (Year): 32 (2006)
Issue (Month): 2 (Spring)
Pages: 205-220
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Handle: RePEc:eej:eeconj:v:32:y:2006:i:2:p:205-220

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  1. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June. [Downloadable!] (restricted)
  2. MD. Ramirez, 2000. "Public capital formation and labor productivity growth in Chile," Contemporary Economic Policy, Western Economic Association International, vol. 18(2), pages 159-169, 04. [Downloadable!] (restricted)
  3. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  4. Teitel, Simon & Colman Sercovich, Francisco, 1984. "Latin America," World Development, Elsevier, vol. 12(5-6), pages 645-660. [Downloadable!] (restricted)
  5. David Aschauer, 1988. "Is government spending stimulative?," Staff Memoranda 88-3, Federal Reserve Bank of Chicago.
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  6. Lin, Steven A Y, 1994. "Government Spending and Economic Growth," Applied Economics, Taylor and Francis Journals, vol. 26(1), pages 83-94, January.
  7. Alexander, W Robert J, 1994. "The Investment-Output Ratio in Growth Regressions," Applied Economics Letters, Taylor and Francis Journals, vol. 1(5), pages 74-76, May. [Downloadable!] (restricted)
  8. Barry P. Bosworth & Susan M. Collins, 1999. "Capital Flows to Developing Economies: Implications for Saving and Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1999-1), pages 143-180. [Downloadable!]
  9. Nader Nazmi & Miguel D. Ramirez, 1997. "Public And Private Investment And Economic Growth In Mexico," Contemporary Economic Policy, Western Economic Association International, vol. 15(1), pages 65-75, 01. [Downloadable!] (restricted)
  10. Meller, Patricio, 1993. "A review of Chilean privatization experience," The Quarterly Review of Economics and Finance, Elsevier, vol. 33(Supplemen), pages 95-112. [Downloadable!] (restricted)
  11. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254. [Downloadable!] (restricted)
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