Threshold effects in the relationship between inward foreign direct investment and import productivity growth in Latin America and the Caribbean

Abstract

In the extensive literature on the role of Foreign Direct Investment (FDI) in developing countries, some studies have found (see Blalock and Gertler 2004, Todo and Miyamoto 2002) that the impact of inward Foreign Direct Investment (FDI) flows on growth was positive and significant. Apart from contributing to domestic investment and employment, FDI enhanced local technology capacity, assisted in promoting innovation through technology transfers and, generally, strengthened the competitive environment in a host country. While it is the case that FDI has been important to the development of many economies of Latin America and the Caribbean, concerns about the capacity of FDI to raise the technological sophistication of these economies and to create more intersectoral linkages are at the heart of the debate about the benefits of FDI. This study examines the impact of FDI on import productivity in Latin America and the Caribbean and found strong evidence of threshold effects with respect to the level of human capital. The findings indicated that the relationship between FDI and growth was dependent on the level of human capital available to the domestic economy. The implication was that raising the level of domestic human capital, through investment in domestic knowledge and innovation was important if countries in Latin America and the Caribbean were to benefit fully from FDI.