FDI flows to Latin America: A panel unit root and panel cointegration test: 1980-2015

This paper estimates a pooled FDI investment function that seeks to identify some of the major economic and institutional determinants of net FDI flows to nine major Latin American countries during the 1980-2016 period. First, it develops a conceptual framework of analysis that seeks to identify some of the major economic and institutional determinants of FDI. Second, the paper gives an overview of FDI flows to Latin America during the 1990-2016 period, with particular emphasis on their contribution to the financing of gross capital formation. Third, an empirical model for FDI flows to Latin America is outlined and an economic rationale is provided for the included variables and their expected signs. Fourth, the paper applies panel unit root tests to the relevant variables to determine if they are stationary and a panel (and group) cointegration test developed by Pedroni (2001). Next, it estimates a "group-mean" fully modified ordinary least squares (FMOLS) panel regression designed to explain the variation in FDI flows to Latin America during the 1980-2015 period. The results suggests that market size (proxied by real GDP), credit provided by the private banking sector, government expenditures on education, and the level of economic freedom as measured by the Fraser Institute have a positive and significant effect. On the other hand, public investment spending, the volatility of real GDP and the real exchange rate have a negative and significant effect on FDI flows. Finally, the paper summarizes the major findings and offers some policy prescriptions for attracting FDI flows to the region and enhancing their positive direct and indirect effects.