Macroeconomic deeds, not reform words: The determinants of foreign direct investment in Latin America

Abstract

Numerous studies on the determinants of foreign direct investment flows in Latin America underscore the importance of risk- and cost-mitigating institutions that support good governance, political and economic freedom, and demonstrate a credible commitment to economic reform by regional governments. This study tests these variables against market size, macroeconomic policy, and factor controls to assess which combinations of variables explain the distribution of foreign inflows. Using a time-series cross-sectional data set of fifteen Latin American economies from 1985 to 2003, the study concludes that past performance on the current account provides sufficient commitment by regional governments and that regime, good governance, and reform variables are, by comparison, inconsistent predictors of foreign direct investment. © 2008 by the Latin American Studies Association.