Differences in the economic growth of Latin American countries: integration effects and foreign direct investment influence

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 driving 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.