New Trends in Latin America and Their Implications for Foreign Direct Investment

Abstract

This analysis focuses on studying whether four significant trends in Latin America may be important determinants of FDI. The trends explored are: increased financial liberalization, improvements in the quality of institutions, shifts towards leftist governments, and increased dependence on exports of natural resources. To test whether these trends can be considered as significant incentives or deterrents to FDI in the Latin American region, this empirical analysis uses a baseline model that includes a set of control variables identified in previous empirical analyses as important determinants of FDI in a panel framework. This study also addresses for endogeneity and incorporates spatial econometric techniques to account for the possibility that FDI inflows in one country may be dependent on the FDI inflows of nearby countries. The main robust findings are that financial liberalization, mineral exports and leftist politics have a significant effect on net FDI. While financial liberalization and mineral exports can be considered as incentives to FDI, the movement towards the left is a deterrent.