Governance as a Determinant of FDI: A Gravity Model for Intraregional Relations in Latin America (2002-2017)

Introduction: Governance as a determinant of foreign direct investment (FDI) within Latin America has been scarcely addressed in the literature, particularly in the context of intraregional capital flows. Objective: To evaluate how both traditional economic variables—such as GDP, population, exchange rate, and geographical distance—and governance indicators—namely voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption—affect bilateral FDI among selected Latin American countries during the period from 2002 to 2017. Methodology: A quantitative approach was employed, using a gravity model applied to a balanced panel of 5,063 observations, covering 323 bilateral relationships over 16 years. Model selection favored fixed effects, as supported by a Hausman test, allowing control over unobserved country-specific heterogeneity. Results: Findings confirm that traditional variables behave according to theoretical expectations. In particular, GDP and distance have a significant influence on FDI flows. Regarding governance indicators, voice and accountability, government effectiveness, and rule of law show statistically significant effects, although some of them are counterintuitive. Conclusions: Governance emerges as a complex but relevant factor in the dynamics of intraregional FDI. Strengthening the rule of law and accountability, as well as ensuring stable regulatory environments, could enhance Latin America’s capacity to consolidate regional investment linkages.