Unravelling the causal associations and path dependencies between Foreign Direct Investment and social development: the case of Panama

Abstract

Academics have majorly explored the positive and negative economic spillover and linkages effects of FDI on economic growth, local wages, productivity and technological knowledge. Nonetheless, alternative benefits induced by FDI on social development have been neglected to be explored in-depth, constraining scholarly contributions to welfare economics. Although preceding works have studied social development factors, they traditionally have been addressed as either positive, negative or neutral in different pockets of academic literature. Moreover, none of them offers a robust empirical/structural framework linking FDI and social development. Panel data figures of MNEs classified as FDI recipients in the Republic of Panama are employed in proposing an empirical/structural framework explanatory of the bidirectional association and causal mechanisms between FDI and social development, using the Social Progress Index as a proxy, moderated by proxy variables of productive linkages and household income. A lop-sided circle, negatively inclined on the association flowing from social development to FDI, is suggested to exist. A ‘weak’ positive effect of FDI on social development is found, supported by a locked-in stable loop of FDI yearly feeding on MNEs profit’s reinvestments. Social development is also found to be in a locked-in stable loop, directly exerting a ‘strongly negative’ impact on FDI, which suggests being a constraining determinant for the country to attract ‘green field’ FDI. The empirical/structural framework herein proposed aims to guide future academic research in welfare economics and also serve policymakers in Panama for understanding and structuring national policies to unlock the self-reinforcing path dependency mechanisms preventing social development potential from being unleashed.