FDI interconnectedness and sustainable economic development: A linear and non-linear Granger causality assessment

Previous studies on foreign direct investment (FDI) have not examined the hidden effects of its inherent connectedness characteristics among different economies. In order to uncover such hidden effects, this study conducts two sets of analyses. Firstly, the systemic risk-based approach constructed using Granger-causality networks and Principal Component Analysis is used to examine the level and degree of the network of pairwise statistical relationships among countries in the Latin American and Caribbean (LAC) region. Secondly, the determinants of the observed connectedness index are examined using regression models. This set of analysis shows that region-specific and global macroeconomic conditions such as the Consumer Price Index of the LAC region, US term spread, and interest rates impact the degree of interconnectedness. The complexity and stability of the system of FDI capital expenditure connectedness within the LAC region offers interesting prospects for macro-economic analysis, policy and stakeholder decision-making and further research development.