CEPAL Review no. 124

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CEPAL Review N° 124 • April 2018 83 Flows vary significantly by region, indicating the areas that have offered the highest returns on capital with a reasonable amount of risk. Flows to Central America and the Caribbean increased by 64% in 2013, although this figure excludes offshore financial centres. The OECS countries will once again expect to benefit as these flows boost their slumping growth rates. While the growth miracles these islands experienced during the tourism boom of the 1980s and 1990s are now long gone, that past experience means that increased growth, fuelled by FDI, is a reasonable expectation. Compared to other developing regions, Caribbean economies receive substantial FDI flows relative to their size. According to our sample, foreign investment in Latin America and the Caribbean was equivalent to 4.4% of regional GDP on average. As figure 2 indicates, this metric is frequently above 10% in OECS; it averaged 11.19% for the period covered by this paper. Saint Kitts and Nevis registered the highest FDI to GDP ratio for the period, with 15.59%, followed by Saint Vincent and the Grenadines (13.47%) then Antigua and Barbuda (10.70%). 16 Figure 2 Average FDI for the period 1983-2013 (Percentages of GDP) 14 12 10 8 6 4 2 0 Antigua and Barbuda Source: World Bank, World Development Indicators. Dominica Grenada Saint Kitts and Nevis Saint Lucia Saint Vincent and the Grenadines Modern growth theory predicts a positive interaction between FDI and economic growth as foreign investment flows improve local conditions (human capital, physical capital, institutions) and transfer productivity-enhancing technology to the host countries. We must model these assumptions to test if these predictions will hold true in this region. This paper therefore provides evidence for and against the plethora of regional policies used to attract FDI. The OECS countries’ share of inflows is presented in figure 3, revealing that, on average, flows are not evenly distributed among countries. The main recipients are Antigua and Barbuda and Saint Lucia, with Saint Kitts and Nevis also receiving a stable and substantial flow of inward FDI. There was a large influx of FDI into the subregion in 2006/2007 in preparation for the ninth edition of the International Cricket Council (ICC) Cricket World Cup, hosted by Antigua and Barbuda, Grenada, Saint Kitts and Nevis, and Saint Lucia. The majority of FDI inflows to the OECS countries have gone into the tourism sector, with very little foreign investment flows reaching other sectors. In addition, these inflows originated in a limited number of countries (specifically Canada, the United States, and the European Union), consequently economic shocks in these countries quickly have a knock-on effect on the small island States. Kareem Martin and Nlandu Mamingi
84 CEPAL Review N° 124 • April 2018 400 Figure 3 FDI inflows to the OECS countries, 1983-2013 (Current US$ millions) 350 300 250 200 150 100 50 0 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: World Bank, World Development Indicators. Antigua and Barbuda Dominica Grenada Saint Kitts and Nevis Saint Lucia Saint Vincent and the Grenadines III. Literature review There is a broad body of literature that focuses on the links between FDI and economic growth or the impact of FDI on the economy. This literature builds on neoclassical theory, according to which FDI only had an impact on capital accumulation, leaving long-term growth unchanged. Long-term growth was only possible through the exogenous variables of technological progress and population growth. Modern endogenous growth models explore the spillover effects of FDI, which include: (i) technological transfer; (ii) productivity gains; (iii) market expansion and other host country enhancements. Hence, the increased interest in the absorptive capacities of developing countries to exploit the long-term growth potential of FDI inflows. 1. FDI flows and growth The theoretical literature provides conflicting views concerning the effect of FDI on growth. This conflict has extended into the realm of empirical research and is reflected in divergent findings. Studies such as Schneider and Frey (1985) found positive and statistically significant relationships between FDI and growth. Conversely, Nigh (1986) and Balasubramanyam, Salisu and Sapsford (1996) are among the studies that reported no significant effect of FDI on the path of economic growth. Bornschier, Chase-Dunn and Rubinson (1978) study the effects of foreign investment and aid on economic growth using annual data from 76 less developed countries for the period 1960-1975 and the ordinary least squares (OLS) method. The findings suggest that the stocks of direct foreign investment and foreign aid have the cumulative effect of decreasing the relative rate of economic growth. The effects are small in the short term and larger in the long term. The 1978 study suggested that future studies could focus on the use of longitudinal data sets, the control of initial correlation between foreign Foreign direct investment and growth in developing countries: evidence from the countries of the Organisation...
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APRIL • 2018 More unequal or less
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Alicia Bárcena Executive Secretary
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Publicaciones recientes de la CEPAL
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estudios del cambio climático en a
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EDITORIAL BOARD Osvaldo Sunkel Chai
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CEPAL Review no. 124

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