Economic Growth, Foreign Direct Investment and International Trade: Evidence on Causality in the Mexican Economy

Abstract

This paper examines both the existence of causality, in the Granger sense, and its direction between Gross Domestic Product (GDP), Exports, Imports and Foreign Direct Investment (FDI) in Mexico. GDP is broken down into two sectors: industrial and services. The cointegration methodology developed by Liu, Burridge and Sinclair (2002) and the tests of structural changes, for the vector of cointegration developed by Quintos and Philips (1993) and Quintos (1997 and 1998) were applied. The estimation shows a stable and causal relationship of FDI over variables such as the industrial GDP, Exports and Imports. However, the service sector tends to not have a direct effect over investments. Notwithstanding that Mexico greatly benefi ts from FDI, as such those benefi ts are triggered by Exports and the industrial GDP, variables that hold a stronger linkage with the economic activity of the United States and not with the actual evolution of the Mexican economy.