Is foreign direct investment beneficial for Mexico? An empirical analysis, 1960–2001

SummaryThis paper examines the impact of foreign direct investment (FDI) on labor productivity growth in Mexico. Using cointegration analysis, a dynamic labor productivity function for the 1960–2001 period is estimated that includes, inter alia, the impact of changes in the stock of private and foreign capital per worker. The error correction model (ECM) estimates suggest that increases in both private (lagged) and foreign (lagged) investment per worker have a positive and economically significant effect on the rate of labor productivity growth. However, after taking into account the growing remittances of profits and dividends, there is a marked decrease in the economic effect of foreign capital per worker on the rate of labor productivity growth. The paper assesses the short-term interactions of the relevant variables via impulse response functions (IRFs) and variance decompositions (VDCs) based on a decomposition process that does not depend on the ordering of the variables.