Does foreign direct investment enhance private capital formation in Latin America? a pooled analysis for the 1981-2000 period

This paper analyzes the theoretical and empirical links between key economic variables such as foreign direct investment (FDI) and private investment spending in Latin America during the 1981- 2000 period. The pooled model tests the complementarity hypothesis which suggests that increases in FDI raise the marginal productivity of private capital via the transfer of more advanced technology and managerial knowhow, thereby inducing higher rates of private investment spending. The paper also addresses the issue of whether changes in the real exchange rate (expenditure-switching policies) have a deflationary effect on the economies of Latin America. The findings suggest that (lagged) FDI, public investment spending, and real credit to the private sector have a positive and significant effect on private capital formation, while lagged changes in the real exchange rate, particularly its volatility, have a negative effect. Finally, the application of panel unit root tests on the stacked residuals of the pooled regressions suggest that the included variables have a stable, non-spurious (cointegrated) relationship.