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Foreign Direct Investment in Latin America: A Panel Regression Study

Since the early 1980s developing countries have generally experienced a heavy influx of foreign capital, and among the developing regions, Latin America has emerged as a prime destination of FDI. An extensive literature has evolved on the inflow of FDI in Latin America, which identifies a number of variables, such as market size, trade openness, etc., as the key determinants of FDI. Due to nonavailability of reliable and consistent data, domestic investment climate as a determinant of FDI has been generally excluded from the literature. This study seeks to fill that void by using the Economic Freedom Index, published since 1995 by The Heritage Foundation, as a proxy for domestic investment climate for a sample of 18 Latin American countries over 1995-2004 period. Employing panel regression methodologies, this study finds that economic freedom is a significant and robust determinant of FDI in Latin America. This study also finds that NAFTA has created an insignificant locational advantage for Mexico vis-a-vis other countries in the sample.