Economic and Institutional Determinants of Foreign Direct Investment in Chile: A Time-Series Analysis, 1960-2001

By Ramirez, Miguel D. | Contemporary Economic Policy, July 2006 | Go to article overview

Economic and Institutional Determinants of Foreign Direct Investment in Chile: A Time-Series Analysis, 1960-2001


Ramirez, Miguel D., Contemporary Economic Policy


I. INTRODUCTION

During the decade of the 1990s, foreign direct investment (FDI) undertaken by transnational corporations (TNCs) became one of the leading factors in promoting the process of economic globalization. Between 1985 and 1990 these flows averaged $142 billion on an annual basis, and during the 1991-2000 period alone they averaged $396 billion, or more than twice as much (see ECLAC 2002). The acceleration in FDI flows during the 1990s was also characterized by an increasing proportion of these funds directed to the developing nations, including the countries of Latin America and the Caribbean. Historically, most FDI flows have been sent to developed countries, but during the decade of the nineties the share of total FDI channeled to developing countries, particularly Asia and Latin America, rose from 14% in 1990 to 22% in 2000. Latin America's share of FDI flows to developing countries rose from 29% in 1995 to 40.9% in 2001, mainly confined to Argentina, Brazil, Chile, and Mexico (ECLAC 2002).

The increase in net FDI flows channeled to these countries, particularly Chile, has been nothing short of spectacular when you factor in the relatively small size of Chile's economy. Between 1990 and 1994 Chile averaged FDI inflows of $1.2 billion, whereas during the 1995-99 period it raised its average almost fivefold to $5.4 billion (ECLAC 2002). During the latter period, Chile ranked only behind Brazil ($19.2 billion) and Argentina ($10.2 billion)--much larger economies--in its ability to attract net FDI inflows. The extant literature contends that in large part this has been due to Chile's relatively successful implementation of macroeconomic stabilization measures and structural reform programs. The former have insured high and sustained rates of economic growth with relatively low inflation rates since 1985, whereas the latter have taken the form of privatization and debt conversion programs, the liberalization of the tradeable sector, and the removal of overly restrictive FDI legislation concerning the repatriation of profits as well as local content and export requirements. The adoption of these fiscally prudent and structural reform policies has reassured both foreign and domestic investors in the country's commitment to market-based, outward-oriented reforms. Only time will tell if these reforms are sustainable in the long run, particularly in the wake of recent economic and financial crises that have buffeted the region. What is indisputable, however, is that FDI flows will play a strategic role not only in modernizing Chile's--and Latin America's--economy but in providing future income and employment opportunities.

In view of these statements, this article analyzes the recent evolution, rationale, and major economic and institutional determinants of FDI flows to Chile. Chile was one of the earliest countries in the region to adopt and implement market-based reforms, albeit at great social and political cost. The process of economic and financial liberalization began following the military coup of 1973, and in recent years, Chile has further liberalized its FDI regime by modifying Decree Law 600 and its debt capitalization mechanism (chapter 19 of the Central Bank's Compensation of International Exchange Regulations). FDI flows in the Chilean case have historically been channeled to traditional sectors, such as mining and energy. However, during the 1990s, a significant proportion of these funds have been channeled to export-oriented manufacturing operations or to nontraditional sectors using innovative technological processes and managerial techniques. An analysis of the evolution and determinants of FDI flows to Chile during the 1990s should uncover important trends and provide valuable policy insights to government officials seeking to attract these flows to the country.

The layout of the article is as follows: First, it reviews some of the major economic and institutional determinants of FDI. …

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