Corruption in Latin America and How It Affects Foreign Direct Investment (FDI): Causes, Consequences, and Possible Solutions

Corruption in Latin America and How It Affects Foreign Direct Investment (FDI): Causes, Consequences, and Possible Solutions

Jose Godinez (Merrimack College, USA)
DOI: 10.4018/978-1-4666-8820-9.ch002
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Abstract

Foreign direct investment has aided in a significant manner the economic development of Latin America since the early 1990s because capital in this region is limited (Blanco, 2012). Despite some criticism literature on FDI has overwhelmingly demonstrated that FDI has positive effects on host countries (Tan & Meyer, 2011) especially in Latin America (Wooster & Diebel, 2010). Authors researching the effects of FDI in Latin America have stated that this investment helps to growth on productivity (Blonigen & Wang, 2005) and thus, might help developing countries to begin their road to development. Therefore, scholars have devoted great efforts to understanding the determinants of FDI to Latin America and a brief overview will be provided in this study.This paper will present a detailed account of FDI flows to the region, a clear definition of corruption and how it is manifested in Latin America. After these definitions, suggestions are provided to deal with the problem of corruption in the region.
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2. Definitions

2.1 Foreign Direct Investment (FDI)

Foreign direct investment (FDI) is defined by the Organization for Economic Cooperation and Development (OECD) as “cross-border investment by a resident entity in one economy with the objective of obtaining a lasting interest in an enterprise resident in another economy” (OECD, 2014). By lasting interest the OECD means that a long-term interest and significant influence between the direct investor and the enterprise should exist. Therefore, to be considered FDI, the foreign investor should at least have 10% of the voting power in an investment made overseas.

Foreign direct investment is a crucial element in international economic integration. FDI generates direct, stable and long-term links between countries. FDI also fosters technology and know-how transfer between economies and it permits the host economy to disseminate its products and services more freely in international markets (OECD, 2014). Moreover, FDI can also be an extra source of funds for investment for the host country, which means that FDI can be seen as an important medium for development.

While a number of scholars argue that inward FDI is necessary for a country to develop, this idea also has its detractors. Several studies have analyzed whether or not inward FDI benefits a host country or region yielding mixing results. According to Balasubramanyam, et al., (1999), FDI is necessary for a developing economy to grow. Others, however, have argued that FDI does not necessarily help the host economy since the rewards do not reach the general public (Borensztein, et al., 1998). However, the general consensus is that FDI would be favorable for the host economy if certain conditions are met. Such conditions include economic policies and development levels of financial and institutional development (Curevo-Cazurra, 2008). Therefore, for a host region to truly benefit from inward FDI, such region must have an adequate institutional structure to support growth. However, the presence of corruption in a host location undermines its institutions and thus, diminishes the potential benefits of FDI flowing to such region.

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