Reforms and political instability in attracting foreign direct investment: a simultaneous equations approach
by Walter Morales; Javier Barbero; Fernando Ubeda
International Journal of Economics and Business Research (IJEBR), Vol. 27, No. 2, 2024

Abstract: The present work aims to identify the elements that condition the attraction of foreign direct investment (FDI) to Latin America, a region that has achieved heterogeneous results under different reforms to improve its economic growth but that has not been exempt from political instability. In this regard, we first estimate this phenomenon through a probit model as a latent variable and then estimate a simultaneous equation model to describe the relationship between FDI, economic growth and political instability, addressing the problems of endogeneity and reverse causality, which are common in these dynamics. The procedure used also allows us to correct the problems related to heteroskedasticity and autocorrelation. The results show that FDI is conditioned by political instability and the latter by the reforms and their momentum. In addition, a favourable institutional framework of freedom and economic growth complements the attraction of FDI.

Online publication date: Mon, 05-Feb-2024

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