Call Us: US - +1 845 478 5244 | UK - +44 20 7193 7850 | AUS - +61 2 8005 4826

substantial tax concessions

This paper analyzed the impact of FDI flows on labor productivity growth in one of the leading countries of Latin America, Chile. Several major findings were presented. First, the evidence for Chile suggests that although FDI flows have been substantial during the second half of the eighties and nineties, particularly in relation to domestic capital formation, a large proportion of these funds has been directed to traditional sectors such as mining and agriculture where value added per worker is relatively low and the technology used is highly standardized and routine in nature. Although Chile DOES FOREIGN INVESTMENT ENHANCE LABOR GROWTH IN CHILE 217 has pursued policies to redirect FDI flows to high priority sectors in the tradable sector via the debt conversion program (discontinued in 1991), the evidence suggests that up until 1995 a significant proportion of FDI flows were not being channeled to innovative “greenfield” investments in the manufacturing sector where technological spillover effects are likely to be greater. FIGURE 1 Chilean Labor Productivity Growth Rate Second, the econometric results suggest that the variables included in the production function have a stable and non-spurious relationship that keeps them in proportion to one another in the long run, even though each variable in level form has a stochastic trend. The ECM estimates show that FDI flows (lagged) had a positive and significant effect on labor productivity growth during the 1960-2000 period, and the interactive term suggests that the effect is stronger during the 1996-2000. The lagged public investment variable, as well as outward-oriented policies (captured by dummies) were also found to have the expected sign and be statistically significant. The EC terms are negative and statistically significant, suggesting that contemporaneous shocks to the long-run labor productivity relationship are corrected in subsequent periods. Finally, Theil inequality coefficients indicate that the EC models are able to track the historical data on labor productivity growth rather well