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Factors Affecting Growth & Performance

The country began this process of economic and financial liberalization following the military coup of 1973 and, in recent years, it has further liberalized its FDI regime by modifying Decree Law 600 and its debt capitalization mechanism (Chapter XIX of the Central Bank’s Compensation of International Exchange Regulations). FDI flows into Chile have been mainly channeled to traditional sectors such as mining and energy sectors. However, during the nineties, a significant proportion of these funds have been channeled to export-oriented manufacturing operations or to non-traditional sectors using innovative technological processes and managerial techniques. An analysis of FDI flows to Chile during the decade of the nineties should uncover important trends and provide valuable insights into the capacity of FDI to transfer up-to-date technology and managerial know-how, as well as its long-term effect on labor productivity growth. The layout of the paper is as follows: First, the paper gives an overview of FDI flows to Chile in terms of their magnitude, composition, and sectoral destination. Second, it develops an endogenous growth model that explicitly incorporates FDI’s potential impact on private capital formation and labor productivity growth. This section also presents an empirical counterpart to the theoretical model developed in the previous section and discusses the data used in this study. Using cointegration analysis, section IV assesses the impact of changes in the stock of FDI on labor productivity during the 1960-2000 period. The last section summarizes the major arguments and offers some policy prescriptions for attracting FDI into the region and enhancing its positive direct and indirect effects.