Foreign Direct Investment and Economic Growth in México : An Empirical Analysis

Abstract: Trade openness, market size, transparency, ease of doing business, location advantagesand low levels of corruption and country risk are the main determinants that attractForeign Direct Investment into a host country. FDI inflows in México have increasedremarkably since 1994 when the North America Free Trade Agreement (NAFTA) cameinto effect. Using multiple regression analysis in order to measure the impact of FDI onGDP; the Empirical results showed that a one percent increase in FDI leads on average toan increase of 0.08 percent in GDP which clearly reflects a positive but neither animportant nor a substantial impact of FDI on economic growth in México as it would beexpected. Time series data analysis for the period 1980-2007 has been tested for UnitRoot by applying the Dickey-Fuller (DF) test. Each time series after the first differencebecomes stationary and therefore it might be a causal relationship among the variables.However, FDI will not have a real impact on the society unless there is an effective stockof Human Capital capable of learning and absorbing the know-how to work successfullywith the technology that Multinational Corporations bring into the host country with theirinvestment. The challenge for the Mexican Government is to create structural reformssuch as the deregulation of energy and oil sector for private investment that will lead toconstantly higher flows of FDI. In the medium term this will then be reflected in thesociety in terms of poverty reduction and development of its population.