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Undergraduate Economic Review

Abstract

Does natural resource abundance decrease Latin American Foreign Direct Investment? This paper studies the effects of natural resource abundance on foreign direct investment (FDI), by focusing on inequality as the channel that links these two variables. Two arguments in the literature inspire this paper: 1) scholars attribute Latin America’s high income inequality to its abundance of natural resources; and 2) some scholars argue that income inequality leads to lower investment. I argue that large shares of capital-intensive endowments (export measured as percentage share of GDP) are associated with low levels of secondary and tertiary FDI. The theory is based on the Stopel-Samuelson model, which claims that rises in the price of a capital-intensive commodity leads to an increase in the return to capital, and conversely, to a fall in the return to labor and wages. I analyze this logic through a two-stage least square model examining 15 Latin American countries from 1984-2007. I conclude, among several conflicting results that the inequality levels generated by exports can explain 40 percent of the variance of secondary and tertiary FDI.

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