Do changes in the rules of the game affect FDI flows in Latin America? A look at the macroeconomic, institutional and regional integration determinants of FDI

- We analyze the determinants of FDI flows in 19 Latin American countries in 1990-2010.
- The stock of FDI, trade openness, short term debt and BOP deficit are significant.
- There is also some evidence that institutional variables affect FDI flows.
- Hierarchical cluster applied to institutional indicators, grouping bottom & top performers.
- Expropriation risk increased in Argentina or Venezuela, where FDI declined.

This paper aims to identify the main determinants of FDI in Latin America during the period 1990-2010. Evidence points to positive influences on FDI inflows of trade openness, maintaining low short-term debt levels and presenting a balance of payment deficit, government stability and low expropriation risk. Countries such as Argentina, Bolivia, Ecuador and Venezuela, in which the investment framework has become relatively less stable over the last decade, are finding it more difficult to attract foreign investors. From a risk-management perspective, both public solutions (such as sovereign guarantees) and private institutions have important roles to play in reducing the uncertainty involved in foreign investment decisions. Another result is that the DR CAFTA agreement does not seem to have played a significant role in the recent increase in investment directed towards Central America.