The FDI-Growth Nexus in Latin America: The Role of Source Countries and Local Conditions

Abstract

Foreign Direct Investment (FDI) has surged in Latin America (LA) since the mid 1990s. European and North American FDI is of capital importance. We investigate the FDI-growth nexus in LA allowing for different source countries, regional heterogeneity, interaction terms with FDI, and more than 20 growth determinants. We use Bayesian Model Averaging to address model uncertainty and to select the best models and most robust parameters. The principal finding is that a positive FDI-growth nexus in LA requires a functioning legal framework and macroeconomic stability. We also find that European FDI is only indirectly correlated with productivity growth, whereas North American FDI is more robust and thus directly correlated with productivity growth.

Keywords: FDI-growth nexus, model uncertainty, Bayesian Model Averaging, Latin America

JEL Classification: C52, F21, F43, O54