Integration and Foreign Investment in Latin America

Abstract

The processes of economic integration in Latin American economies have logic that goes beyond the simple interest of trade creation. The governments focus on the benefit produced by Foreign Direct Investment (FDI) as one of the most important reasons to formalize trade agreements. FDI differs in the way in which this investment relates with the local producer sector and the strategy trade policy followed by local governments. In this sense Latin American economies may receive horizontal or vertical FDI, and this chapter aims to examine the impact of strategic trade policies on the inflows of FDI into two Latin American regions: North Region and South Region. These investment flows come from three economic zones: Asia, America, and European Union. To this end, the gravity equation to compare the weight of variables such as distance, infrastructure, trade openness, and cultural affinity as independent variables and FDI as the dependent variable is estimated. The results obtained show that the strategy trade policy followed in the North Region in the form of trade liberalization, and the strategy trade policy followed in the South Region in the form of a relative closeness with the custom union plus the proposed trade agreements with other regions encouraged inflows of FDI in both regions during the analyzed period. While the gravity hypothesis holds on the South Region, in the North Region it does not hold. In the North Region, vertical FDI is received, and in the South Region it is horizontal FDI.