Is Foreign Direct Investment Productive in the Latin America Case? A Panel Unit Root and Panel Cointegration Analysis, 1980-2001
This paper analyzes the theoretical and empirical links between key economic variables such as foreign direct investment (FDI) and private investment spending in Latin America during the 1980-2001 period. The pooled model for nine major Latin American countries tests the complementarity hypothesis which suggests that a ceteris paribus increase in FDI raises the marginal productivity of private capital by increasing the pool of available resources and enhancing the transfer of more advanced technology and better managerial practices. The paper also addresses the issue of whether changes in the real exchange rate (expenditure-switching policies) have a deflationary effect on the economies of Latin America. To test the hypothesis put forth by the critics of FDI that it diverts resources away from financing capital formation, the paper generates a "net" variable for FDI flows by deducting the repatriation of profits and dividends from the gross FDI inflows. In general, the findings 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 th period standard deviation, have a negative effect. In the case of the net FDI variable, it remains significant but its impact is reduced by more than half when the repatriation of profits and dividends is taken into account. The aforementioned estimates are obtained via the application of recently developed panel unit root and panel (Pedroni) cointegration tests on the included variables in the pooled investment function.
|Date of creation:||May 2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (203) 432-3576
Fax: (203) 432-5779
Web page: http://www.econ.yale.edu/ddp/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nicholas Apergis & Costantinos Katrakilidis & Nikolaos Tabakis, 2006. "Dynamic Linkages between FDI Inflows and Domestic Investment: A Panel Cointegration Approach," Atlantic Economic Journal, International Atlantic Economic Society, vol. 34(4), pages 385-394, December.
- Ana Cuadros & Vicente Orts & Maite Alguacil, 2004. "Openness and Growth: Re-Examining Foreign Direct Investment, Trade and Output Linkages in Latin America," Journal of Development Studies, Taylor & Francis Journals, vol. 40(4), pages 167-192.
- Jorgenson, Dale W, 1971. "Econometric Studies of Investment Behavior: A Survey," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1111-47, December.
- Magnus Blomstrom & Edward N. Wolff, 1989.
"Multinational Corporations and Productivity Convergence in Mexico,"
NBER Working Papers
3141, National Bureau of Economic Research, Inc.
- Blomstrom, Magnus & Wolff, E.N., 1989. "Multinational Corporations And Productivity Convergence In Mexico," Working Papers 89-28, C.V. Starr Center for Applied Economics, New York University.
- Cardoso, Eliana, 1993. "Private Investment in Latin America," Economic Development and Cultural Change, University of Chicago Press, vol. 41(4), pages 833-48, July.
- David A. Aschauer, 1989. "Public investment and productivity growth in the Group of Seven," Economic Perspectives, Federal Reserve Bank of Chicago, issue Sep, pages 17-25.
- 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.
- 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(1), pages 143-180.
- P. Krugman & L. Taylor, 1976.
"Contractionary Effects of Devaluations,"
191, Massachusetts Institute of Technology (MIT), Department of Economics.
- Fishlow, Albert, 1990. "The Latin American State," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 61-74, Summer.
- Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
- M. Ramirez, 2000. "Foreign Direct Investment in Mexico: A Cointegration Analysis," Journal of Development Studies, Taylor & Francis Journals, vol. 37(1), pages 138-162.
- Lutfi Erden & Randall G. Holcombe, 2005. "The Effects of Public Investment on Private Investment in Developing Economies," Public Finance Review, , vol. 33(5), pages 575-602, September.
- Pedroni, Peter, 1999.
" Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 61(0), pages 653-70, Special I.
- Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
- Kaddour Hadri, 1999. "Testing The Null Hypothesis Of Stationarity Against The Alternative Of A Unit Root In Panel Data With Serially Correlated Errors," Research Papers 1999_05, University of Liverpool Management School.
- Peter Pedroni, 2001.
"Purchasing Power Parity Tests In Cointegrated Panels,"
The Review of Economics and Statistics,
MIT Press, vol. 83(4), pages 727-731, November.
- Peter Pedroni, 2001. "Purchasing Power Parity Tests in Cointegrated Panels," Department of Economics Working Papers 2001-01, Department of Economics, Williams College.
- Tom Doan, . "RATS programs to replicate Pedroni PPP tests on panel data," Statistical Software Components RTZ00132, Boston College Department of Economics.
- Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002.
"Unit root tests in panel data: asymptotic and finite-sample properties,"
Journal of Econometrics,
Elsevier, vol. 108(1), pages 1-24, May.
- Tom Doan, . "LEVINLIN: RATS procedure to perform Levin-Lin-Chu test for unit roots in panel data," Statistical Software Components RTS00242, Boston College Department of Economics.
- Tony Killick & Moazzam Malik & Marcus Manuel, 1992. "What Can We Know About the Effects of IMF Programmes?," The World Economy, Wiley Blackwell, vol. 15(5), pages 575-598, 09.
- Joshua Greene & Delano Villanueva, 1991. "Private Investment in Developing Countries: An Empirical Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 33-58, March.
- Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003.
"Testing for unit roots in heterogeneous panels,"
Journal of Econometrics,
Elsevier, vol. 115(1), pages 53-74, July.
- Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
- Tom Doan, . "IPSHIN: RATS procedure to implement Im, Pesaran and Shin panel unit root test," Statistical Software Components RTS00098, Boston College Department of Economics.
- Pastor, Manuel Jr., 1989. "Current account deficits and debt accumulation in Latin America: Debate and evidence," Journal of Development Economics, Elsevier, vol. 31(1), pages 77-97, July.
- 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.
- Ram, Rati & Zhang, Kevin Honglin, 2002. "Foreign Direct Investment and Economic Growth: Evidence from Cross-Country Data for the 1990s," Economic Development and Cultural Change, University of Chicago Press, vol. 51(1), pages 205-15, October.
When requesting a correction, please mention this item's handle: RePEc:ecl:yaleco:23. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.