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Is Foreign Direct Investment Productive in the Latin America Case? A Panel Unit Root and Panel Cointegration Analysis, 1980-2001

  • Ramirez, Miguel D.

    (Trinity College)

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.

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Paper provided by Yale University, Department of Economics in its series Working Papers with number 23.

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Date of creation: May 2007
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Handle: RePEc:ecl:yaleco:23
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  1. 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.
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  5. 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.
  6. 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.
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  8. 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.
  9. 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.
  10. 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.
  11. Peter Pedroni, 2001. "Purchasing Power Parity Tests in Cointegrated Panels," Department of Economics Working Papers 2001-01, Department of Economics, Williams College.
  12. M. Ramirez, 2000. "Foreign Direct Investment in Mexico: A Cointegration Analysis," Journal of Development Studies, Taylor & Francis Journals, vol. 37(1), pages 138-162.
  13. Cardoso, Eliana, 1993. "Private Investment in Latin America," Economic Development and Cultural Change, University of Chicago Press, vol. 41(4), pages 833-48, July.
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  17. 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.
  18. 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.
  19. Fishlow, Albert, 1990. "The Latin American State," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 61-74, Summer.
  20. 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.
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  22. 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.
  23. 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.
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