U.S. foreign direct investment in Latin America and the Caribbean: a case of remittances and market size

ABSTRACT

This article investigates the effect of remittances on U.S. foreign direct investment (FDI) flows to Latin America and the Caribbean (LAC). It covers 26 countries for the period 1983–2010. The results show a positive and significant impact of remittances on U.S. FDI flows. However, this effect depends upon the level of gross domestic product (GDP) per capita of the host country. On average, the results show that increasing remittances by one standard deviation increases U.S. FDI flows by 0.44 percent a year. Also, host country demand positively affects U.S. FDI flows, which supports the market size hypothesis.

KEYWORDS:

• Foreign direct investment
• remittances
• market size
• United States
• Latin America and the Caribbean

JEL CLASSIFICATION:

• F24
• O51
• O54
• P33

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The Bureau of Economic Analysis (BEA) defines U.S. direct investment abroad as the ownership or control, directly or indirectly, of a least 10 percent of the voting securities of an incorporated foreign company or the equivalent interest in an incorporated foreign company by a U.S. resident. In this article, FDI refers to FDI flows.

² Figure 1 represents developing regions as grouped by BEA. So, Latin America and other western hemisphere country group is different from the group of countries included in this study.

³ Bermuda is excluded because it is classified as develop economy by the United Nations System.

⁴ Authors’ calculations using data from BEA.

⁵ A host country is a receiver of FDI, and a home country is a supplier of FDI.

⁶ Remittances are the sum of worker’s remittances, compensation of employees and migrants’ transfers received by individuals in the migrant home country.

⁷ Figure 2 represents the countries in LAC as grouped by the World Bank, not just the 26 countries in this study.

⁸ These are transfers made by migrants who are employed for more than a year in a migrant host country in which migrants are considered residents.

⁹ The GDP per capita threshold is the log value of GDP per capita that makes the sum of remittances and the interaction term positive, or $logGDPpercapita\ge \left(-\frac{{\beta }_{remittances}}{{\beta }_{interactionterm}}\right)$. However, if both estimates are positive (negative), then remittances have an unambiguously positive (negative) effect on U.S. FDI flows.