Hostname: page-component-586b7cd67f-tf8b9 Total loading time: 0 Render date: 2024-11-22T05:27:01.291Z Has data issue: false hasContentIssue false

Economic Reforms and Inflows of Foreign Direct Investment in Latin America

Published online by Cambridge University Press:  05 October 2022

Glen Biglaiser
Affiliation:
Texas Tech University
Karl DeRouen Jr.
Affiliation:
The University of Alabama
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

This paper seeks to explain the effect of different economic reforms for attracting foreign direct investment (FDI) in Latin America. Controlling for macroeconomic and good governance factors, we find that governments that implement economic reforms are not always more likely to attract FDI inflows. Instead, attempts to minimize expropriation risk complement domestic financial and trade reforms, which enhances foreign investor interest. Elements of both good governance and reform are important. The results provide reasons for optimism—the fact that most economic reforms are not essential for attracting FDI suggests that countries seeking FDI will encounter fewer obstacles.

Resumen:

RESUMEN:

Este trabajo busca explicar el efecto de diferentes reformas econornicas con el objetivo de atraer inversion extranjera directa (lED) en America Latina. Controlando factores macroeconomicos y de gobernabilidad, encontramos que los gobiernos que implementan reformas econornicas no siempretiendenaatraerentradasde JED. Parotrolado, intentosparaminimizar el riesgo de expropiacion complementan las reformas a nivel financiero y de comercio, que elevan el interes de los inversionistas extranjeros. De todas maneras, elementos tanto de gobernabilidad como de reforrna no dejan de ser importantes. Los resultados proporcionan optimismo—el hecho de que la mayoriade las reformas económicas nos sean esenciales para atraer IED sugiere que paises que busquen IED tropezarán con menos obstáculos.

Type
Research Article
Copyright
Copyright © 2006 by the University of Texas Press

Footnotes

1.

The authors acknowledge the help of David Brulé, Hye Jee Cho, Harvey Kline, Monty Marshall, Uk Heo, Geoffrey Garrett, Ron Rogowski, Michael New, John Tures, and three anonymous reviewers. Special thanks to Nate Jensen for his many useful suggestions on this work.

References

Achen, Christopher 2000 “Why Lagged Dependent Variables Can Suppress the Explanatory Power of Other Dependent Variables.” Unpublished manuscript. Available at: http://polmeth.wustl.edu/papers/00/achen00.zip.Google Scholar
Agarwal, Jamuna P., Gubitz, Andrea, and Nunnenkamp, Peter 1992 Foreign Direct Investment in Developing Countries: The Case of Germany. Ann Arbor, MI: University of Michigan Press.Google Scholar
Akinsanya, Adeoye A. 1980 The Expropriation of Multinational Property in the Third World. New York, NY: Praeger.Google Scholar
Ames, Barry 2000 The Deadlock of Democracy in Brazil. Ann Arbor, MI: University of Michigan Press.Google Scholar
Amirahmadi, Hooshang, and Wu, Weiping 1994Foreign Direct Investment in Developing Countries.” Journal of Developing Areas 26: 167190.Google Scholar
Armijo, Leslie Elliott, Ed. 1999 Financial Globalization and Democracy in Emerging Markets. New York: Palgrave/St. Martin's Press.Google Scholar
Baer, Werner 1972Import Substitution and Liberalization in Latin America.” Latin American Research Review 7: 95122.CrossRefGoogle Scholar
Baer, Werner, and William R. Miles, Eds. 2001 Foreign Direct Investment in Latin America: Its Changing Nature at the Turn of the Century. Binghamton (NY): International Business Press.Google Scholar
Bajpai, Nirupam, and Sachs, Jeffrey D. 2000 “Foreign Direct Investment in India: Issues and Problems.” Development Discussion Paper 759, Harvard Institute for International Development.Google Scholar
Banks, Arthur S. 1999 Cross-National Time-Series Data Archive. Birmingham, NY: Banner SoftwareGoogle Scholar
Beck, Nathaniel, and Katz, Jonathan N. 1995What to Do (and Not to Do) with Time-series Cross-section Data.” American Political Science Review 89: 634647.CrossRefGoogle Scholar
Bhagwati, Jagdish N., Dinopoulos, Elias, and Wong, Kar-yu 1992Quid Pro Quo Foreign Investment.” The American Economic Review 82:186190 Biglaiser, Glen, and David S. BrownGoogle Scholar
Bhagwati, Jagdish N., Dinopoulos, Elias, and Wong, Kar-yu 2003The Determinants of Privatization in Latin America.” Political Research Quarterly 56: 7385.Google Scholar
Biglaiser, Glen, and Danis, Michelle 2002Privatization and Democracy: The Effects of Regime Type in the Developing World.” Comparative Political Studies 35: 83102.Google Scholar
Birch, Melissa H. 1991Changing Patterns of Foreign Investment in Latin America.” Latin American Business Review 31: 141158.Google Scholar
Birch, Melissa H. 1994Foreign Direct Investment in Latin America during the 1990s.” In Privatization in Latin America: New Roles for the Public and Private Sectors, edited by Baer, Werner and Birch, Melissa H., 95116. Westport, CT: Praeger.Google Scholar
Birch, Melissa H., and Halton, Garrett 2001Foreign Direct Investment in Latin America in the 1990s: Old Patterns, New Trends, and Emerging Issues.” In Foreign Direct Investment in Latin America: Its Changing Nature at the Turn of the Century, edited by Baer, Werner and Miles, William R., 1332. Binghamton, NY: International Business Press.Google Scholar
Boeker, Paul H. 1993 Latin America's Turnaround: Privatization, Foreign Investment, and Growth. San Francisco: International Center for Economic Growth: Institute of the Americas: ICS Press.Google Scholar
Bollen, Kenneth A., and Jones, Scott T. 1982Political Instability and Foreign Direct Investment: The Motor Vehicle Industry, 1948–65.” Social Forces 60: 10701088.CrossRefGoogle Scholar
Brewer, Thomas 1993Foreign Direct Investment in Emerging Market Countries.” In The Global Race for Foreign Direct Investment, edited by Oxelheim, Lars, 177204. New York: Springer-Verlag.CrossRefGoogle Scholar
Cho, Hye Jee 2003Political Risk, Labor Standards, and Foreign Direct Investment.” Presented at the 61st Midwest Political Science Association Annual Conference, Chicago Palmer House Hilton, April 36.Google Scholar
Coppedge, Michael 1999District Magnitude, Economic Performance, and Party-system Fragmentation in Five Latin American Countries.” Comparative Political Studies 30: 156186.CrossRefGoogle Scholar
Crenshaw, Edward 1991Foreign Direct Investment as a Dependent Variable.” Social Forces 69: 11691182.CrossRefGoogle Scholar
De Soto, Hernando 2000 The Mystery of Capitalism: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books.Google Scholar
Dixon, William, and Boswell, Terry 1996Dependency, Disarticulation, and Denominator Effects: Another Look at Foreign Capital Penetration.” American Journal of Sociology 102: 766782.CrossRefGoogle Scholar
Dunning, John H. 1981 International Production and the Multinational Enterprise. Boston: Allen and Unwin.Google Scholar
Edwards, Sebastian 1995 Crisis and Reform in Latin America: From Despair to Hope. New York: Oxford University Press.Google Scholar
Elligsen, Tore, and Warneryd, Karl 1999Foreign Direct Investment and the Political Economy of Protection.” International Economic Review 40: 357379.CrossRefGoogle Scholar
Feng, Yi 2003 Democracy, Governance, and Economic Performance: Theory and Evidence. Cambridge, MA: MIT Press.CrossRefGoogle Scholar
Figueiredo, Argelina Cheibub, and Limongi, Fernando 2000Presidential Power, Legislative Organization, and Party Behavior in Brazil.” Comparative Politics 32: 151171.CrossRefGoogle Scholar
Firebaugh, Glenn 1992Growth Effects of Foreign and Domestic Investment.” American Journal of Sociology 98: 105130.CrossRefGoogle Scholar
Frieden, Jeffry A. 1991 Debt, Development, and Democracy: Modern Political Economy in Latin America. Princeton: Princeton University Press.Google Scholar
Gastanaga, Victor M., Nugent, Jeffrey B., and Pashamova, Bistra 1998Host Country Reforms and FDI Inflows: How Much Difference do they Make?World Development 26: 12991314.CrossRefGoogle Scholar
Globerman, Steven, and Shapiro, Daniel 2002Global Foreign Direct Investment Flows: The Role of Governance Infrastructure.” World Development 30: 18991919.CrossRefGoogle Scholar
Gourevitch, Peter A. 1993Democracy and Economic Policy: Elective Affinities and Circumstantial Conjectures.” World Development 21: 12711280.CrossRefGoogle Scholar
Grosse, Robert 1997Foreign Direct Investment in Latin America.” In Generating Savings for Latin American Development, edited by Grosse, Robert, 135153. Coral Gables, FL: North-South Center Press, University of Miami.Google Scholar
Grosse, Robert 2001Intra- and Extraregional Foreign Direct Investment in Latin America.” In Financing for Development in Latin America and the Caribbean, edited by Franco, Andrés, 119143. New York: United Nations University Press.Google Scholar
Haendel, Dan 1979 Foreign Investments and the Management of Political Risk. Boulder: Westview Press Inc.Google Scholar
Haggard, Stephan, and Kaufman, Robert R. 1995The Challenges of Consolidation.” In Economic Reform and Democracy, edited by Diamond, Larry and Plattner, Marc F., 112. Baltimore: Johns Hopkins University Press.Google Scholar
Haley, Mary Ann 1999Emerging Market Makers: The Power of Institutional Investors.” In Financial Globalization and Democracy in Emerging Markets, edited by Leslie Elliott Armijo, 7490. New York: Palgrave/St. Martin's Press.Google Scholar
Hall, Peter 1989 The Political Power of Economic Ideas: Keynesianism across Nations. Princeton: Princeton University Press.CrossRefGoogle Scholar
Harms, Philipp, and Ursprung, Heinrich W. 2002Do Civil and Political Repression Really Boost Foreign Direct Investments?Economic Inquiry 40: 651663.Google Scholar
Heo, Uk, and DeRouen, Karl 2002Modernization and Dependency Revisited: US Direct Investment, Development, and Polity in LA, 1950–1998.” Global Economic Review 31 (3): 6793.CrossRefGoogle Scholar
Hirschman, Albert O. 1968The Political Economy of Import-substitution Industrialization in Latin America.” Quarterly Journal of Economics 82: 132.CrossRefGoogle Scholar
Huntington, Samuel P. 1968 Political Order in Changing Societies. New Haven: Yale University Press.Google Scholar
Jensen, Nathan M. 2002 “The Political Economy of Foreign Direct Investment.” Ph.D. diss, Yale University, New Haven, CT.Google Scholar
Jensen, Nathan M. 2003Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment.” International Organization 57:587616Google Scholar
Keele, Luke, and Kelly, Nathan 2004 “Dynamic Models for Dynamic Theories: The Ins and Outs of Lagged Dependent Variables.” Unpublished manuscript. Available at http://polmeth.wustl.edu/papers/04/LDVApril21.pdfGoogle Scholar
Kentor, Jeffrey 1998The Long-term Effects of Foreign Investment Dependence on Economic Growth, 1940–1990.” American Journal of Sociology 103: 10241046.CrossRefGoogle Scholar
Knack, Stephen, and Keefer, Philip 1995Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures.” Economics and Politics 7: 207227.CrossRefGoogle Scholar
Lehmann, Alexander 1999 “Country Risks and the Investment Activity of U.S. Multinationals in Developing Countries.” IMF Working Papers WP/99/133.CrossRefGoogle Scholar
Levis, Mario 1979Does Political Instability in Developing Countries Affect Foreign Investment Flow? An Empirical Examination.” Management International Review 19: 5968.Google Scholar
Li, Quan, and Resnick, Adam 2003Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries.” International Organization 57: 175211.CrossRefGoogle Scholar
Lipsey, Robert E. 2001Foreign Direct Investment and the Operations of Multinational Firms: Concepts, History, and Data.” NBER Working Paper, w8665. Cambridge, MA: National Bureau of Economic Research.Google Scholar
Lora, Eduardo 1997A Decade of Structural Reforms: All Pain No Gain?” In Latin America after a Decade of Reforms: Economic and Social Progress 1997 Report (part 2). Washington, D.C.: Inter American Development Bank.Google Scholar
Mallampally, Padma, and Sauvant, Karl 1999Foreign Direct Investment in Developing Countries.” Finance and Development 36: 3437.Google Scholar
Manzetti, Luigi 1999 Privatization South American Style. New York: Oxford University Press.CrossRefGoogle Scholar
Markusen, James R. 1995The Boundaries of Multinational Enterprises and the Theory of International Trade.” The Journal of Economic Perspectives 9: 169189.CrossRefGoogle Scholar
Marshall, Monty 2002Measuring the Societal impact of War.” In From Reaction to Conflict Prevention: Opportunities for the UN System, edited by Fen Osier Hampson and Malone, David, 63104. Boulder: Lynne Rienner.Google Scholar
Marshall, Monty G., and Jaggers, Keith 2002 Polity IV Project: Political Regime Characteristics and Transitions, 1800–2000. College Park: University of Maryland, http://www.cidcm.umd.edu/inscr/polity/Google Scholar
McKeown, Timothy J. 1999The Global Economy, Post-Fordism, and Trade Policy in Advanced Capitalist States.” In Continuity and Change in Contemporary Capitalism, edited by Kitschelt, Herbert, Lange, Peter, Marks, Gary, and Stephens, John D., 1135. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Morley, Samuel A., Machado, Roberto, and Pettinato, Stefano 1999 Indexes of Structural Reform in Latin America. Santiago: ECLAC.Google Scholar
North, Douglass C. 1990 Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Oneal, John 1988Foreign Investment in Less Developed Regions.” Political Science Quarterly 103: 131148.CrossRefGoogle Scholar
Oneal, John 1994The Affinity of Foreign Investors for Authoritarian Regimes.” Political Research Quarterly 47: 565589.CrossRefGoogle Scholar
Oneal, John, and Oneal, Frances 1988Hegemony, Imperialism, and the Profitability of Foreign Investment.” International Organization 42: 347373.CrossRefGoogle Scholar
Oxford University Press 1995 Bureaucrats in Business: The Economics and Politics of Government Ownership. New York.Google Scholar
Pastor, Manuel Jr. 1992Inversión Privada y el'Efecto Arrastre'de la Deuda Externa en América Latina.” El Trimestre Económico 59: 107151.Google Scholar
Pastor, Manuel Jr., and Hilt, Eric 1993Private Investment and Democracy in Latin America.” World Development 21: 489507.CrossRefGoogle Scholar
Ramamurti, Ravi 1996The New Frontier of Privatization.” In Privatizing Monopolies: Lessons from the Telecommunications and Transport Sectors in Latin America, edited by Ramamurti, Ravi, 145. Baltimore: Johns Hopkins University Press.Google Scholar
Ramirez, Miguel D. 2001Foreign Direct Investment in Mexico and Chile: A Critical Appraisal.” In Foreign Direct Investment in Latin America: Its Changing Nature at the Turn of the Century, edited by Baer, Werner and Miles, William R., 5582. Binghamton, NY: International Business Press.Google Scholar
Remmer, Karen L. 1991 Military Rule in Latin America. Boulder: Westview Press.Google Scholar
Rodrik, Dani 1996Understanding Economic Policy Reform.” Journal of Economic Literature 34: 941.Google Scholar
Root, F. and Ahmed, A.A. 1978The Influence of Policy Instruments on Manufacturing Direct Foreign Investment in Developing Countries.” Journal of International Business Studies 9: 8194.CrossRefGoogle Scholar
Rothgeb, John M. 1984The Effects of Foreign Investment on Overall and Sectoral Growth in the Third World States.” Journal of Peace Research 21: 415.CrossRefGoogle Scholar
Rothgeb, John M. 1990Investment Dependence and Political Conflict in the Third World Countries.” Journal of Peace Research 27: 255272.CrossRefGoogle Scholar
Rothgeb, John M. 1991The Effects of Foreign Investment upon Political Protest and Violence in Underdeveloped Societies.” The Western Political Quarterly 44: 938.CrossRefGoogle Scholar
Rummel, R.J. and Heenan, David A. 1978How Multinationals Analyze Political Risk.” Harvard Business Reviezv 1: 6776.Google Scholar
Schott, Jeffrey J. and Oegg, Barbara 2001Europe and the Americas: Toward a TAFTA-South?The World Economy 24: 745759.Google Scholar
Shugart, Matthew Soberg, and Carey, John M. 1992 Presidents and Assemblies: Constitutional Design and Electoral Dynamics. Cambridge, UK: Cambridge University Press.Google Scholar
Sikkink, Kathryn 1991 Ideas and Institutions: Developmentalism in Brazil and Argentina. Ithaca: Cornell University Press.Google Scholar
Spero, Joan Edelman, and Hart, Jeffrey A. 2003 The Politics of International Economic Relations, 6th ed. Belmont, CA: Thomson Wadsworth.Google Scholar
Stallings, Barbara, and Kaufman, Robert R. 1989Debt and Democracy in the 1980s: The Latin American Experience.” In Debt and Democracy in Latin America, edited by Stallings, Barbara and Kaufman, Robert, 205216. Boulder: Westview Press.Google Scholar
StataCorp 2001 Stata Statistical Software: Release 7.0. College Station, TX: Stata Corporation.Google Scholar
Svensson, Jakob 1999Aid, Growth and Democracy,” Economics & Politics 11: 275297.CrossRefGoogle Scholar
Thorp, Rosemary 1998 Progress, Poverty and Exclusion: An Economic History of Latin America in the 20th Century. Washington, D.C.: Inter-American Development Bank.Google Scholar
Toral, Pablo 2001 The Reconquest of the New World: Multinational Enterprises and Spain's Direct Investment in Latin America. Burlington: Ashgate.Google Scholar
Trevino, Len J., Daniels, John D., and Arbeláez, Harvey 2002Market Reform and FDI in Latin America: An Empirical Investigation.” Transnational Corporations 2: 2943.Google Scholar
Trevino, Len J., Daniels, John D., Arbeláez, Harvey, Upadhaya, Kamal P. 2002Market Reform and FDI in Latin America: Evidence from an Error Correction Model.” International Trade Journal 36: 367–92.Google Scholar
Tsebelis, George 2002 Veto Players: How Political Institutions Work. New York: Russell Sage Foundation; Princeton: Princeton University Press.CrossRefGoogle Scholar
Tuman, John P., and Emmert, Craig F. 1999Explaining Japanese Foreign Direct Investment in Latin America, 1979–1992.” Social Science Quarterly 80: 539555.Google Scholar
Tuman, John P., and Emmert, Craig F. 2004The Political Economy of U.S. Foreign Direct Investment in Latin America: A Reappraisal.” Latin American Research Review 39: 928.CrossRefGoogle Scholar
Tures, John A. 2003The Impact of Instability and Institutions on U.S. Foreign Direct Investment in Developing Areas.” Journal of Conflict, Security and Development 3: 163183.CrossRefGoogle Scholar
Vernon, Raymond 1971 Sovereignty at Bay: The Multinational Spread of U.S. Enterprises. New York: Basic Books.Google Scholar
Vernon, Raymond 1998 In the Hurricane's Eye: The Troubled Prospects of Multinational Enterprises. Cambridge: Harvard University Press.CrossRefGoogle Scholar
Wilkins, Mira 1974 The Maturing of Multinational Enterprise: American Business Abroad from 1914 to 1970. Cambridge: Harvard University Press.CrossRefGoogle Scholar
Winters, Jeffrey A. 1999Indonesia: On the Mostly Negative Role of Transnational Capital in Democratization.” In Financial Globalization and Democracy in Emerging Markets, edited by Leslie Elliott Armijo, 233250. New York: Palgrave/St. Martin's Press.Google Scholar
Wintrobe, Ronald 1998 The Political Economy of Dictatorship. Cambridge, UK: University Press.CrossRefGoogle Scholar
World Bank 2003 World Development Indicators. Washington, D.C.Google Scholar