Capital flows to Latin American countries: effects of foreign direct investment and remittances on growth and development

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Title: Capital flows to Latin American countries: effects of foreign direct investment and remittances on growth and development
Author: Vacaflores Rivero, Diego Eduardo
Abstract: The significant restructuring of international capital flows to developing countries ? in particular to Latin American countries ? observed in the last quarter century has generated significant research in the area to examine its potential impact on development efforts . The resurgence of foreign direct investment (FDI ) and the increasing significance of remittances , both as shares of gross domestic product (GDP ) , have made these types of capital flows the most analyzed . Despite the large fraction of empirical studies that find a positive and significant relationship between FDI and economic growth , an important fact that has been so far overlooked in the literature is its impact on standards of living in host countries . This dissertation first establishes the strong complementary connection between FDI and economic growth in Latin America , measured by increases in GDP per capita growth rates , to then examine additional channels through which it could affect the welfare of the region . I first show that FDI has a positive effect on central government tax revenues , which is mainly channeled through its effect on taxes on goods and services . I then show that FDI has a positive and significant effect on the employment rates in these host countries , with female employment rate getting the largest impact ? relative to males . Remittances are another capital flow that plays a large and important role in certain economies , exceeding 10 % of GDP in some countries . The impact of remittances on the main macroeconomic measures of a small open economy is analyzed in the last section using a stochastic limited participation model with cash in advance constraints and costly adjustment of cash holdings . After verifying that the model responds adequately to standard shocks , a remittances shock is introduced to examine the dynamic response of the representative economy . The results show that a positive remittances shock forces the exchange rate to depreciate and lowers both output and consumption in the period of the shock . The positive shock lowers utility during the shock but raises it from the following period onwards , improving discounted utility after 10 years when remittances are 10 % of GDP and there are no adjustment costs .
URI: http : / /hdl .handle .net /1969 .1 /ETD -TAMU -1475
Date: 2009-05-15

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Capital flows to Latin American countries: effects of foreign direct investment and remittances on growth and development. Available electronically from http : / /hdl .handle .net /1969 .1 /ETD -TAMU -1475 .

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