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Measuring Productivity

Critics of FDI have long argued that, instead of increasing the investable resources of the host nation, FDI flows represent a net drain on the country’s scarce resources because they generate substantial reverse flows in the form of remittances of profits and dividends to the parent companies, as well as through the widespread practice of intra-firm transfer pricing [Cypher and Dietz, 1997; Plasschaert, 1994]. The net contribution of FDI to private capital formation can be computed by deducting from these (gross) inflows the repatriation of profits and dividends to the parent companies. For Latin America as a whole, profit and dividend remittances to the developed countries more than tripled between 1990 and 2000, from $7.0 billion to over $25 billion [ECLAC, 2001]. Chile’s remittances of profits and dividends registered more than a sevenfold increase between 1990 and 2000, from $335 million to $2.4 billion. In relative terms, Chile’s remittances of profits and dividends averaged 52 percent of total FDI flows over the 1990-99 period. If we subtract profits and dividends from gross FDI flows and express the net figure as a proportion of fixed capital formation, it is evident from Table 1 (part B) that the net contribution of FDI inflows to gross fixed capital formation to Chile, although increasing in recent years, is far less than that suggested by gross FDI inflows. In fact, Table 1 (part B) shows that it was even negative during the 1992-93 period; that is, it diverted resources away from the financing of fixed capital formation