Foreign Direct Investment, Economic Freedom and Growth: New Evidence from Latin-America

Abstract

This paper explores empirically the interplay between economic freedom, Foreign Direct Investment (FDI) and growth. We pursue a panel data analysis on a sample of 18 Latin-American countries over the period 1970-1999. Basic findings are two: First, economic freedom in the host country is found to be a positive determinant of FDI inflows into that nation. Second, FDI is positively correlated with economic growth in the host countries of the sample considered. We attribute this empirical regularity to the idea that FDI may help the process of technological diffusion from leaders to developing countries. The empirical analysis also points out to the need of a certain level of social capacity in the host country to benefit from the entrance of FDI.

Keywords: foreign direct investment, economic freedom, economic growth, technological diffusion

JEL Classification: 040