Foreign Direct Investment and Economic Growth in the Pacific Alliance countries

Abstract

This article empirically analyzed the relationship between foreign direct investment (FDI) and economic growth (EG) in the Pacific Alliance countries. Quarterly data was used for each variable, and unit root tests, cointegration, and causality tests were applied. Additionally, a multivariate error correction model and impulse response functions were estimated. The main hypotheses were that FDI promotes the economic growth of the recipient countries and that economic growth contributes to attracting higher FDI flows. The results showed that in some countries, foreign investment promoted economic growth and, in turn, that EG contributed to attracting higher investment flows. However, in other cases, this relationship did not hold. These results suggest that factors such as infrastructure, financial market development, macroeconomic stability, institutional quality, and human capital are determinants of maximizing the benefits of FDI.

Keywords:

Foreign direct investment Economic growth Economic integration

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