Abstract
There is a strong body of literature that finds a direct connection between inward foreign direct investment and economic growth in the host country. At the same time, economic growth in the host country attracts additional Foreign Direct Investment (FDI). This bidirectional relationship can be supported by the IMF through its lending program to countries to assist in dealing with short-term shocks as well as managing more long-term structural issues. In fact, the IMF programs in theory should provide an indicator to potential investors that the country is committed to making a change and opening its economy, which are typical requirements under IMF conditions. IMF intervention should lead to a positive impact on inward FDI. This study examines the impact of IMF-support programs on inward FDI for a sample of Latin American and Caribbean Countries. The results from this study reveal that being on an IMF borrowing program has a negative impact on inward FDI in the second and third year. We argue that being on an IMF borrowing program does not provide inward FDI with the seal of approval that it requires in making an investment.
Highlights
In the post-1970s period, countries worldwide have moved from a hostile stance towards inward foreign direct investment (FDI) to one that is very supportive and intentionally positive
We develop into testable hypotheses for the Latin American and Caribbean countries (LAC) countries in the following manner: H01: Participation in an IMF financing program has a positive impact on the level of host country FDI inflows
We focus our attention on the key programs namely the Stand-by Arrangement (SBA), the Extended Fund Facility (EFF), the Extended Credit Facility (ECF), the Precautionary and Liquidity Line (PLL), and the Flexible Credit Line (FCL)
Summary
In the post-1970s period, countries worldwide have moved from a hostile stance towards inward foreign direct investment (FDI) to one that is very supportive and intentionally positive. Inward FDI is no longer viewed as parasitic and hindering the development of domestic industries. Inward FDI is considered to have several positive effects to the host country, which includes enhancements in productivity as a result of the introduction of new processes and knowledge, technology transfer, development of local industry, and access to overseas markets (see Bende-Nabende and Ford, 1998; Borensztein et al, 1998; Carkovic and Levine, 2002; De Gregorio, 2003). Whether through trade or productivity or both, there is a strong body of prior studies supporting the linkage between inward investment and economic growth (De Mello, 1997; Borensztein et al, 1998; Glass and Saggi, 1999). De Gregorio (2003) found that an increase of 1% of inward FDI increased economic growth in the host country by approximately 0.6%
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