Changes in patterns of territorial distribution of foreign direct investment in Latin American and Caribbean region

Abstract

The aim of this paper is to categorize Latin American and Caribbean countries into broader groups according to the similarities and dissimilarities between them in terms of the level (attractiveness) and determinants of FDI inflows, with regard to the two different periods. In terms of methodology, we employ agglomerative hierarchical clustering technique. The results of cluster analysis indicate that during the decade ending in 2019 there was a change in the attractiveness for FDI at the country level. In 2012, the best-performing clusters in terms of FDI inward flows as a percentage of GDP consisted of Latin American economies with the highest levels of development – Costa Rica, Uruguay, Brazil, Argentina and Chile. These countries exhibited good results in stock of infrastructure, level of human capital and all institutional and political variables, regardless of variables such as natural resource endowments or labour costs. This suggests that the motives of FDI inflows in more advanced Latin American countries were relatively diversified. In 2019, the cluster consisting of Honduras, Nicaragua, El Salvador, Guatemala, the Dominican Republic and Mexico became the most attractive in terms of average FDI inflows as a percentage of GDP. This cluster performs better in locational determinants peculiar to the efficiency-seeking motive of FDI, such as low labour costs, low total tax and contribution rate and high degree of trade openness.