DIFFERENCES IN THE ECONOMIC GROWTH OF LATIN AMERICAN COUNTRIES. INTEGRATION EFFECTS AND FOREIGN DIRECT INVESTMENT INFLUENCE

Abstract

This paper tries to explain the wide range of economic experiences among Latin American countries taking into account
the role of capital formation and foreign direct investment (FDI) as a drive engine of growth. We design a model in which
FDI generates endogenous, non zero growth. In particular, FDI brings about growth because it facilitates the entry of
intermediate goods of more advanced technology in the host country. In contrast, if the entrance of FDI is obstructed or
precluded by policy measures in the host country, the growth rate of the latter will be smaller or even zero. Integration
enables countries to exchange more varieties of goods and eases technological diffusion through FDI. The predictions are
tested empirically using GMM technique in a panel data performed by 18 Latin American countries over the period 1970-
2000. The estimations suggest that Latin America’s growth rates are positively related to a more open attitude and to a
greater integration in international markets. However, the empirical analysis also points out to the need of a certain degree
of social capacity to ensure a successful integration. Finally, the empirical exercise confirms the positive connection
between FDI and growth predicted by the model.