Does Foreign Direct Investment Enhance Labor Productivity Growth in Chile? A Cointegration Analysis

Miguel Ramirez

Eastern Economic Journal, 2006, vol. 32, issue 2, 205-220

Abstract: This paper examines the impact of foreign direct investment (FDI) on labor productivity growth in Chile. After a critical review of the Chilean experience with FDI flows during the 1990s, the paper presents a simple growth model that explicitly incorporates any positive (negative) externalities generated by additions to the foreign capital stock. Using cointegration analysis, the article estimates a dynamic labor productivity function for the 1960-2000 period that includes, inter alia, the impact of changes in the stock of foreign and public capital. The error correction model (ECM) estimates suggest that increases in both public (lagged) and foreign (lagged) investment have a positive and economically significant effect on the rate of labor productivity growth. The error correction terms of the estimated model are negative and statistically significant, thus suggesting that deviations of actual labor productivity from its long-run value are corrected in subsequent periods. The article also reports historical simulations from the estimated ECMs that show that the models are able to track the movements in the actual series. Finally, the paper offers some cautionary observations with regard to the role of FDI flows in promoting capital formation and labor productivity growth in Chile.

Date: 2006
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