Foreign Capital and Economic Growth in Mexico: Further Time-Series Evidence, 1970-2020

Abstract

This paper tests whether changes in the accumulated stocks of gross FDI and net FDI (after subtracting net payments of profits and interest) have a positive or negative effect on Mexican economic growth over the 1970-2020 period. The novelty of the paper resides in the fact that it is one of the few in the extant literature to examine the effect of changes in the stock of net FDI on economic growth as opposed to changes in the stock of gross FDI. The focus on Mexico is based on the availability of time series data for a sufficiently long period of time (51 years) and on its strategic economic and geopolitical importance to the United States stemming from its membership in the USMCA. The first section examines the relevant literature and motivates the discussion of the economic importance of reverse flows in the Mexican case. This is followed by a presentation of the conceptual model and its empirical counterpart. The fourth section presents the results for an error correction model during the 1970-2020 period along with actual and in-sample (historical) forecasts generated by the model. Tests for reverse “causality” or precedence are undertaken via the VECM Granger Causality/Block Exogeneity test and they suggest that FDI flows lead economic growth rather than the reverse. The last section is the conclusion.