آیا چین بر سرمایه گذاری مستقیم خارجی بر آمریکای لاتین تاثیر می گذارد؟

We analyze empirically whether the emergence of China as a large recipient of FDI has affected the amount of FDI received by Latin American countries. Allowing for the structural break related to China's WTO accession, we found a significant negative impact of Chinese inward FDI on that of Mexico until 2001 and on that of Colombia after that date. The rest of Latin American countries do not seem to be affected by Chinese inward FDI. For the region as a whole, there is no significant Chinese effect on Latin America’s FDI.

The rapid emergence of China as an important player in the global economy is a remarkable issue with consequences for the rest of the world. An important aspect is foreign direct investment (FDI) since China has been attracting a growing share of FDI flows since 1990s. After receiving an average of $28 billion in the 1990s, China's annual FDI inflows have increased to $47 billion on average since World Trade Organization (WTO) membership in 20011 (Fig. 1) and have continued to grow even faster, reaching $79 billion in 2005. In a relatively short period of time, China has accumulated the third largest stock of inward FDI after the US and the UK. Foreign firms are attracted by China's rapid economic growth, increasing demand for consumer goods, a relatively skilled and educated workforce for the wages paid, improved infrastructure and a more predictable business environment. Since the early 1980s, China has drawn significant investment from regional conglomerates in Hong Kong, Taiwan and Singapore, but also from the largest industrial economies, particularly Japan and the US. In the same way as many countries fear China as a competitor in the export markets, there is a growing concern, especially in developing countries, that FDI may be diverted into China. FDI is very important for Latin America since it has been the major source of external financing in the last few years and has also helped modernize the region's economic structure. Nonetheless, FDI flows to Latin America started to fall in 2000 while FDI to China was accelerating (Fig. 1). Given its relevance for the future of the region, deepening our knowledge of the determinants of inward FDI seems clearly warranted. This is what this study does, focusing on the impact of China as an always more important recipient of FDI. Whether external financing is diverted from Latin American countries into China will depend on a number of factors. A first one is the degree of integration of capital markets. If capital markets are not fully integrated across countries – or, more likely, regions – an increase in Chinese inward FDI will not necessarily imply a reduction in FDI to another country or region. The large regional FDI flows in Asia may fit into this description. In fact, Hong Kong, Taiwan and Singapore have been the main suppliers of FDI to China while practically irrelevant for other parts of the world, including Latin America. A second aspect is the impact of Chinese inward FDI on worldwide FDI flows. If foreign direct investors reap large benefits from their presence in this country, or there are spillovers in other countries, more savings may be converted into FDI also in other areas of the world. This would imply that the supply of FDI flows is elastic to changing conditions. In the same vein, China's contribution to raising the rate of return of FDI could twist investors' preference towards FDI instead of other private capital flows (mainly portfolio or cross-border lending), particularly if their returns were hardly correlated with those of FDI. A third aspect is the nature of Chinese inward FDI. If oriented towards exports, it might reduce FDI in other countries which compete in the same export markets. This will be less so if FDI is oriented towards China's domestic demand. In addition, if FDI substantially increases Chinese imports, it might foster FDI to other countries which are suppliers of Chinese imports. This will particularly be the case for exporters of commodities, which China is scarce of. It seems, thus, clear that the impact of Chinese inward FDI on Latin American countries is an empirical question. There have been very few attempts in the literature to address this issue. A first step – even if only descriptive – is found in a recent publication by the IADB (2004). The report depicts the evolution of cumulative bilateral FDI flows to Latin America and to China and calculates a coincidence index of FDI home countries, which appears to be low. Chantasasawat, Fung, Iizaka, & Siu (2004) analyze empirically whether China is taking FDI away from other Asian and Latin American countries. They find that the level of Chinese inward FDI is positively related to other Asian economies' inward FDI and that there is practically no impact on Latin American countries. They also conduct the same exercise on their shares of FDI to total FDI flows where they do show a negative Chinese effect on the Asian and Latin American shares. In our paper, we continue with the empirical approach and go beyond Chantasasawat et al. (2004) in a number of ways. First, we use bilateral (home–host) data and not aggregate one. Bilateral data describes much better investor's behaviour, avoids a potential aggregation bias and limits collinearity problems. Second, we not only estimate the impact of Chinese inward FDI on Latin America as a whole, but also differentiate among countries since their productive structure and the type of FDI they attract is very different. For instance, Mexico and Central America have generally received export-oriented FDI while South America has mainly attracted FDI into the non tradable sector (financial services and utilities), as well as for the extraction of natural resources. We would, therefore, expect China to have a negative impact of the first group of countries but not on the second. In the latter case, it could even turn positive as China steps up its demand for commodities. A third difference between Chantasasawat et al. (2004)'s approach and ours is that they assume the supply of FDI to be inelastic. This is quite a restrictive assumption for emerging countries, which have to compete for financing. We allow for the possibility of an elastic supply of FDI by introducing other capital flows as an additional regressor. In this way, we capture potential substitution or complementarities among flows. Fourth, we take into account the adjustment cost of FDI, which is known to be relevant for long-term (generally physical) investment, such as FDI. Fifth, we improve on the econometric technique to take better account of endogeneity. We use the generalized method of moments, instrumenting potentially endogenous variables with lags, exogenous variables and other valid instruments, in order to obtain unbiased and consistent estimators and as efficient as possible. Finally, we compare different time spans, so as to assess whether China's impact on other countries inward FDI is a recent phenomenon, linked to the negotiations and final participation in the WTO, or began already after China announced it would open up its economy at the end of the 1970s. Our results show that there is virtually no “Chinese effect” on Latin American inward FDI from 1993 to 2003. However, when we allow for a structure break coinciding with WTO accession, Mexico seems to be negatively affected prior to China's WTO entry and Colombia thereafter. This paper is organized as follows: Section 2 reviews the literature of FDI determinants; Section 3 describes the dataset, the variables included, their sources and the expected relation with Latin American inward FDI; Section 4 sets out our econometric strategy and its advantages and caveats; Section 5 reviews the results; and, finally, Section 6 draws the main conclusions and policy implications.

In this paper we investigate how Chinese inward FDI affects FDI flows to Latin American countries. When taking into account the structural break which occurred with China's WTO entry in 2001, we do find evidence of FDI dislocation from Latin American countries to China. More specifically, we report a significant negative impact of Chinese inward FDI on that of Mexico until 2001 and on that of Colombia thereafter. Finally, the rest of Latin America countries are not affected. In addition, no effect is found for the whole sample period. All in all, Latin America's inward FDI seems to be only marginally – if at all – affected by China. The more worrisome results from Mexico and Colombia, suggest that competing in the same sectors as China increases the likelihood of a substitution of FDI. Having a cursory look a the sector structure of FDI in Mexico and Colombia, we find that manufacturing accounts for 56% of total in the case of Mexico (the largest of all sectors) and 21% in the case of Colombia (the largest after financial services). By contrast, Brazil has a much smaller share of FDI in manufacturing (about 10%) while most of it concentrates on telecommunications and financial services.16 In any event, this interpretation of the results should be taken with care since we do not have enough evidence that this is the main channel through which China affects Latin American FDI. To that end, we would need bilateral and sectoral FDI data, which are not available. When looking into the future, there are reasons to expect that China will continue to receive large amounts of FDI, and perhaps even increase them: the country has embarked in a large privatization process, which has already been announced for some sectors. In addition, the wage differential with Latin American countries will probably be maintained for quite some time given China's large – for some close to infinite – elasticity of labour supply. Finally, even if wages increase substantially, purchasing power for a very large population would also do. This will make China a particularly attractive country for FDI targeting domestic demand. This scenario, where China continues to attract a large share of world FDI, may seem worrisome for Latin American countries, particularly those with a more similar productive structure to that of China. However, it only reflects one side of the coin. At the same time, it provides tremendous opportunities in the medium term. Due to geographical and technological reasons, Latin American countries are not in such good position as Asian economies to profit from China's manufacturing needs. However, they will clearly benefit from China's increasing demand for raw materials in a scenario where China continues to grow fast. This is not only true for Latin American exports but also for inward FDI in sectors related to raw materials. Interestingly, potential investors in the region are not only OECD countries, but also China, which will want to ensure its access to raw materials. This is why the further opening of these sectors to foreign investors is an important condition for Latin American countries to reap these benefits of China's increasing global presence.