Economic and Institutional Determinants of FDI in the Chilean Case: An Empirical Analysis, 1960-2014

This paper examines some of the major economic and institutional factors underlying the surge in foreign direct investment (FDI) flows to Chile during the more recent 1990-2014 period. It reports econometric results which suggest that standard economic variables and major changes in the institutional-legal status of foreign capital are, in large measure, responsible for the rapid increase in net FDI inflows to leading sectors of the Chilean economy. Cointegration analysis and error-correction modeling suggest that market size, the real exchange rate, the debt-service ratio, education, physical infrastructure, and the Fraser Institute’s economic freedom index are economically significant in explaining the variation in net FDI inflows to the country. Dummy variables, designed to capture qualitative factors such as the impact of economic crises and institutional reforms, are also included and they have their anticipated signs and are statistically significant. The paper also addresses the long-term negative effects of rapidly growing profit and dividend remittances on the financing of capital formation and the Chilean balance of payments in recent years.