Foreign direct investment and economic growth

This paper employs ordinary least squares (OLS) estimation to examine the determinants of foreign direct investment (FDI) and the effect of FDI on per capita GDP growth in Bolivia over the period 1990:1-1998:4. The regression results find that the real effective multilateral exchange rate, the ratio of external debt to GDP, and a dummy representing capitalization inflows significantly impact FDI, while FDI, along with the terms-of-trade, the ratio of private sector credit to GDP, and the ratio of government spending to GDP are shown to have a statistically significant impact on per capita GDP growth. The exclusion of capitalization inflows from total FDI in the FDI determinants model has very little impact on the overall results. Additional sections of the paper examine FDI in historical context and the composition of FDI by breaking down FDI flows by sector and country of origin. Historically, FDI inflows have been concentrated in the hydrocarbon and mining sectors. However, inflows to these and other sectors were low when compared to other countries in the region, likely in response to political and economic stability. In recent years FDI in the mining sector has declined, while FDI in the hydrocarbon and service sectors has surged to unprecedented levels. These two sectors received 80.4 percent of all FDI over the period 1990-98. Finally, the United States continues to be the principal source of FDI in Bolivia. Over the 1990-98 period FDI originating in the United States represented 40.7 percent of all FDI i