Foreign direct investment, exports and economic growth: an empirical approach using cointegration techniques for CAN

Abstract

Foreign direct investment (FDI) and exports are relevant factors to increase economic growth. The objective of this research is to evaluate the effect of foreign direct investment and exports on the economic growth of the countries of the Andean Community of Nations, during the period 1977 - 2016. The research used ARDL cointegration techniques to determine the existence of long-term equilibrium, error correction model (VEC) for short-term equilibrium, Granger’s (1969) causality test for causality between variables. The results of the ARDL model indicate that there is a long-term balance between economic growth, FDI and exports for Peru, Colombia and Bolivia, while in Ecuador there is no long-term balance. In the VEC model, a short-term equilibrium is determined to exist. Granger’s (1969) causality test specifies that for Peru there is one-way causality that goes from GDP to exports and for Bolivia there is one-way causality that goes from exports to GDP. In addition, a one-way causality that goes from FDI to GDP for Peru and Bolivia. The following policy implications are drawn from the results: first, the governments of the economies analyzed should prioritize the attraction of FDI, through the creation of free zones to be attractive to foreign investors. Secondly, governments could improve national production through new technologies that increase the number of exports and thus increase incomes for these economies.