Yale University Department of Economics

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1 Yale University Department of Economics Working Papers on Economic Applications and Policy Discussion Paper Number 23 IS FOREIGN DIRECT INVESTMENT PRODUCTIVE IN THE LATIN AMERICA CASE? A PANEL UNIT ROOT AND PANEL COINTEGRATION ANALYSIS, Miguel D. Ramirez May 2007 Department of Economics Yale University P.O. Box New Haven, CT This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection:

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35 TABLE 1. Selected Latin American Nations: Foreign Direct Investment Flows as a Percentage of Gross Fixed Capital Formation. Country Argentina Brazil Chile Colombia Costa Rica Ecuador Mexico Peru Uruguay Venezuela Latin America Source: Computed by author from UNCTAD, World Investment Report, 1999, Tables B.1. and B.5., pp. 478 and ; UNCTAD, World Investment Report, 2003, Table B.5, pp ; ECLAC, Foreign Investment in Latin America and the Caribbean, 2002, Tables I.2 and I.3; and ECLAC, Statistical Annex, 2002, Table 12, p.760.

36 TABLE 2 Pool Unit Root Tests: Individual Effects Estimation Method Variable (levels) LLC Breitung IPS Hadri I p /Y * lny * I g /Y * CRP/Y * S/Y * I f /Y * I f (net)/y * 2.95* REX * Method Variable (differences) LLC Breitung IPS Hadri Δ(I p /Y) -4.20* -3.50* -5.10* 1.45 ΔlnY -8.21* -6.29* -8.41* Δ(I g /Y) -8.82* -4.80* -8.36* 1.16 Δ(CRP/Y) -4.41* -1.80* -5.98* 1.60 Δ(S/Y) -6.90* -4.60* -8.02* 0.35 Δ( I f /Y) -6.00* -2.94* -7.62* 0.59 Δ( I f net/y) -7.15* -2.13* -7.50* 1.21 Δ(REX) -9.16* -3.93* -8.02* Note: LLC= Levin, Lin, Chu (2002), IPS= Im, Pesaran, Shin (2003). The statistics are asymptotically distributed as standard normal with a left hand side rejection area, except on the Hadri test, which is right sided. A * indicates the rejection of the null hypothesis of nonstationarity (LLC, Breitung, IPS) or stationarity (Hadri) at the 5 percent level of significance. Total number of observations (NT) ranged between 173 and 198. Estimations undertaken with EViews5.1.

37 TABLE 3. Panel Cointegration Tests for Pooled Investment Function. A. Without Dummies Panel Statistics Group Statistics Variance ratio Rho statistic PP statistic * * ADF statistic * * B. With Dummies Panel Statistics Group Statistics Variance ratio Rho statistic PP statistic * * ADF statistic * * Notes: All reported values are asymptotically distributed as standard normal. The variance ratio test is right-sided, while the other Pedroni tests are left-sided. A * indicates the rejection of the null of unit root or no cointegration at the 0.05 level of significance. NT=198. Estimations undertaken with Rats 6.01.

38 TABLE 4. ADF Fisher Unit Root Test on Residuals: Individual Effects Estimation. Method Statistic Prob ADF Fisher Chi-square ADF Choi Z-stat Intermediate ADF Test Results on Residuals Cross Section Prob. Lag Max Lag Obs. Argentina Brazil Chile Colombia Costa Rica Ecuador Mexico Peru Uruguay Note: Probabilities for Fisher tests are computed using an asymptotic Chi-square distribution. Automatic selection of lags based on Schwartz Information Criterion: 0-4. Estimations performed by Eviews5.1.

39 TABLE 5. Panel Group FMOLS Results, Dependent Variable: Private Investment Ratio. FMOLS Regressions Variables (1) (2 ) (3) (4) (5) (lny) t (4.51)* (5.82)* (7.39)* (8.60)* (4.90)* (I f /Y) t (2.76)* (2.80)* (2.32)* (4.14)* (I g /Y) t (2.18)* (2.50)* (3.28)* (3.10)* (-1.55) a (CRP/Y) t (5.22)* (5.04)* (5.03)* (5.05)* (4.22)* (S/Y) t (5.24)* (7.05)* (9.00)* (7.67)* (8.33)* (REX) t (-2.68)* (-2.11)* SD(REX t ) (-2.05)* (-3.72)* (-4.60)* D (-7.03)* (-4.56)* D (1.72)* (I p /Y) t (1.97)* (2.24)* (2.65)* (2.13)* (1.91)* Notes: Coefficients are long-run estimates of private investment spending with respect to the relevant regressors. T-ratios are in parenthesis. Equation (5) includes common time dummies to account for (contemporaneous) cross-sectional dependency. An * denotes statistical significance at least at the 5 percent level, while an a represents significance at the 10 percent level. NT= 198. Estimations undertaken with Rats 6.01.

40 TABLE 6. Panel Group FMOLS Results, Dependent Variable: Private Investment Ratio. FMOLS Regressions Variables (1) (2 ) (3) (4) (lny) t (5.61)* (6.91)* (6.27)* (5.20)* (I f net/y) t (2.14)* (1.87)* (1.80)* (1.74)* (I g /Y) t (1.79)* (2.47)* (2.38)* (1.31) (CRP/Y) t (3.26)* (5.52) * (4.85)* (2.06)* (S/Y) t (5.11)* (6.04)* (6.02)* (4.03)* (REX) t (-1.48) a (1.52) a SD(REX t ) (-2.20)* (-2.76) D (-4.69)* (I p /Y) t (1.76)* (1.80)* (1.68)* (1.65)* Notes: Coefficients are long-run estimates of private investment spending with respect to the relevant regressors. T-ratios are in parenthesis. Equation (4) includes common time dummies to account for (contemporaneous) cross-sectional dependency. An * denotes statistical significance at least at the 5 percent level, while an a represents significance at the 10 percent level. NT= 198. Estimations undertaken with Rats 6.01.

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