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Is Foreign Direct Investment Beneficial for Mexico? A Cointegration Analysis, 1958-2010

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  • Miguel Ramirez

    ()
    (Department of Economics, Trinity College)

Abstract

This paper examines the question of whether foreign direct investment (FDI) enhances labor productivity growth in Mexico. Using cointegration analysis, a dynamic labor productivity function for the 1958-2010 period is estimated that includes, inter alia, the impact of changes in the stock of private and foreign capital per worker. The vector error correction model (VECM) estimates suggest that increases in both private (lagged) and foreign (lagged) investment per worker have a positive and economically significant effect on the rate of labor productivity growth. However, after taking into account the growing remittances of profits and dividends, there is a marked decrease in the economic effect of foreign capital per worker on the rate of labor productivity growth. The paper assesses the short-term interactions of the relevant variables via impulse response functions (IRFs) and variance decompositions (VDCs) based on a decomposition process that does not depend on the ordering of the variables.

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File URL: http://internet2.trincoll.edu/repec/WorkingPapers2013/WP13-11.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by Trinity College, Department of Economics in its series Working Papers with number 1311.

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Length: 41 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:tri:wpaper:1311

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Keywords: vector error correction model; foreign direct investment; Gregory-Hansen cointegration single-break test; impulse response functions; Johansen cointegration test; KPSS (no unit root) stationarity test; labor productivity growth; variance decompositions; Zivot-Andrews single-break unit root analysis.;

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  1. Ram, Rati, 1986. "Government Size and Economic Growth: A New Framework and Some Evidencefrom Cross-Section and Time-Series Data," American Economic Review, American Economic Association, vol. 76(1), pages 191-203, March.
  2. Magnus Blomstrom & Edward N. Wolff, 1989. "Multinational Corporations and Productivity Convergence in Mexico," NBER Working Papers 3141, National Bureau of Economic Research, Inc.
  3. Brian Aitken & Gordon H. Hanson & Ann E. Harrison, 1994. "Spillovers, Foreign Investment, and Export Behavior," NBER Working Papers 4967, National Bureau of Economic Research, Inc.
  4. Robert J. Barro, 1995. "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc.
  5. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  6. Blomstrom, Magnus & Persson, Hakan, 1983. "Foreign investment and spillover efficiency in an underdeveloped economy: Evidence from the Mexican manufacturing industry," World Development, Elsevier, vol. 11(6), pages 493-501, June.
  7. Chandana Chakraborty & Parantap Basu, 2002. "Foreign direct investment and growth in India: a cointegration approach," Applied Economics, Taylor & Francis Journals, vol. 34(9), pages 1061-1073.
  8. Feder, Gershon, 1983. "On exports and economic growth," Journal of Development Economics, Elsevier, vol. 12(1-2), pages 59-73.
  9. Paul M. Romer, 1987. "Crazy Explanations for the Productivity Slowdown," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 163-210 National Bureau of Economic Research, Inc.
  10. Luiz de Mello, 1997. "Foreign direct investment in developing countries and growth: A selective survey," Journal of Development Studies, Taylor & Francis Journals, vol. 34(1), pages 1-34.
  11. Pesaran, M. H. & Shin, Y., 1997. "Generalised Impulse Response Analysis in Linear Multivariate Models," Cambridge Working Papers in Economics 9710, Faculty of Economics, University of Cambridge.
  12. Ramirez, Miguel D., 2003. "Mexico under NAFTA: a critical assessment," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(5), pages 863-892.
  13. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  14. 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.
  15. Waheed, Muhammad & Alam, Tasneem & Ghauri, Saghir Pervaiz, 2006. "Structural breaks and unit root: evidence from Pakistani macroeconomic time series," MPRA Paper 1797, University Library of Munich, Germany.
  16. Miguel Ramirez, 2000. "The impact of public investment on private investment spending in Latin America: 1980–95," Atlantic Economic Journal, International Atlantic Economic Society, vol. 28(2), pages 210-225, June.
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