Investment Climate And Foreign Direct Investment: A Study Of Selected Countries In Latin America

Since the early 1980s, developing countries around the world have lifted restrictions on foreign capital inflow. Among the Latin American countries, Mexico has now become a prime destination of FDI. There are however eight other countries in the region --Argentina, Bolivia, Brazil, Costa Rica, Ecuador, Nicaragua, Panama, and Peru, that have emerged as Mexico’s main regional rivals as FDI destinations. For this sample of nine countries, this study econometrically estimates the determinants of FDI, examines the relationship between FDI and economic freedom, and analyzes the investment climate from foreign firms’ perspective. Using panel regression models, this study finds that FDI inflow is significantly boosted by foreign investors’ increased familiarity with the host economy, better infrastructure, higher return on investment, and greater trade openness, but the inflow is significantly depressed by lack of economic freedom. Furthermore, this study finds that FDI inflow is negatively correlated with policy changes that result in higher trade barriers, more repressive taxation, more restrictive foreign investment code, more repressive financial system, and further price and wage controls. Finally, this study identifies two factors --excessive bureaucracy and inefficient financial markets, which have possibly created locational disadvantages for Mexico vis-à -vis its regional rival countries.