The FDI-Growth Nexus in Latin America: The Role of Source Countries and Local Conditions

Foreign Direct Investment (FDI) has surged in Latin America (LA) since the mid 1990s. European and North American FDI is of capital importance. We investigate the FDI-growth nexus in LA allowing for different source countries, regional heterogeneity, more than 20 growth determinants, and interaction terms with FDI. We use Bayesian Model Averaging to address model uncertainty and to select the best models and most robust parameters. The principal finding is that a positive FDI-growth nexus in LA requires a functioning legal framework and macroeconomic stability. We also find that European FDI is only indirectly correlated with productivity growth, whereas North American FDI is more robust and, thus, directly correlated with productivity growth.