Policy shocks as a source of endogenous growth

Economic policy may play a prominent role in favoring transitions from scenarios of no growth to others in which growth is positive. One example of this sort of behavior is the removal of restrictions to the entrance of Foreign Direct Investment (FDI) in developing countries. This paper designs and discusses a simple model in which a change in policy favors the entrance of FDI. Foreign investment, in turn, generates endogenous, non-zero growth in a previously stagnated economy, since FDI is one of the channels, whereby developing countries may access more advanced technology. Next, we present some empirical evidence obtained by exploiting a panel data from 18 Latin American countries over the period 1970-2000. Regressions of the growth rate of GDP per capita on FDI and a set of control variables seem to confirm the hypothesis that FDI promotes growth. The correlation is rather stable and robust to the use of several techniques, to the introduction of alternative control variables and to the consideration of different subsamples. (c) 2005 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.