Does Foreign Direct Investment Promote Growth? Recent Evidence from Latin America

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Paper author(s): 
Marta Bengoa (Universidad de Cantabria)
Blanca Sanchez-Robles (Universidad de Cantabria)
Macroeconomics - Economic growth - Monetary Policy

Recent research has stressed the role of technology as one of the crucial drive engines of growth. Not every country, however, has the same possibilities to access advanced technology. Many LDCs lack the necessary social infrastructure in order to innovate and must often recur to technology invented elsewhere. One of the channels whereby technology may diffuse from developed to developing countries is Foreign Direct Investment (FDI). This paper designs and discusses a simple model in which FDI generates endogenous, non zero growth. In particular, FDI brings about growth because it offsets the tendency to decreasing returns to domestic capital exhibited by the production function. However, if the entrance of FDI is obstructed or precluded by policy measures in the host country, the growth rate of the latter will be smaller or even zero. The model also predicts that a policy shock intended to reduce the entry cost for multinationals may generate positive, endogenous growth in an otherwise stagnant economy. Next, we present some empirical evidence obtained by exploiting a panel data from 18 Latin American countries over the period 1970-2000. Regressions of the growth rate of GDP per capita on FDI and a set of control variables seem to confirm the hypothesis that FDI promotes growth.


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