How does Colombia attract foreign direct investment?

During the eighties, Latin America was surrounded by economic crises, increased external debt, and poor growth of the Gross Domestic Product as well as little attraction of foreign direct investment (FDI). Later in the nineties, some countries in the region inspired by the desire to eliminate the protectionist model had to undertake reforms that sought to achieve their commercial opening to start a new economic model and thereby show the world as an attractive area for attracting investment mainly from Europe and Asia. One of the countries that made institutional changes by creating good conditions in the nineties as well as in the next decade to attract FDI was Colombia. The purpose of this paper is to demonstrate how Colombia attracted foreign capitals during 2005-2012. A probit model was applied (Botello, J.&Davila, M.,2015) to determine if the probability of improving the number of determinants to attract FDI will result in more inflows. The results show that the design of an industrial policy focused on attracting FDI, as well as the increase of the Gross Domestic Product, the offer of natural resources to foreign investors, the skilled workforce and the improvements in infrastructure were the determinants that increased the attraction of capitals. The implications for policy makers are to improve the rest of the determinants studied in this original research to increase the FDI flows into Colombia. Corresponding author: Juan Carlos Botello Email address for corresponding author: juancarlos.botello@upaep.mx First submission received: 5th June 2018 Revised submission received: 5th November 2018 Accepted: 24th November 2018 Introduction In recent years, FDI has grown faster than trade flows and global production for various reasons such as political and economic changes in many developing countries. Those changes are characterized by the shift to democratic political systems as well as changes toward economic and legal systems oriented in the direction of trade liberalization in which Colombia and other countries played an important role since 1951 when signed as a GATT member. Many developing countries have made economic and structural changes in order to obtain some benefits and attract FDI, in that sense, FDI flows are likely to be attracted to developing economies that pursue an outward-oriented strategy of economic development such as Colombia (IMF, 2015). In Latin America, the relative stability of the region and the adoption of outward-oriented public policies have reassured foreign and local investors based on market reforms. Because of such liberalization and changes, the FDI increased in developing countries in the 1990 ́s (Erdal, F. & Tatoglu, F., 2002) and particularly, Latin America has shown a sustainable growth since 2010 (ECLAC, 2013). International Journal of Business and Economic Development, Vol. 6 Number 3 November 2018 www.ijbed.org A Journal of the Academy of Business and Retail Management (ABRM) 2 On the other hand, the attractiveness of a state or a city for foreign direct investment flows depends on the number and kind of determinants they possess. Deichmann, J., Karidis, S. &Sayek, S. (2003) found that some factors determining the spatial decisions of multinational firms in a Middle East country depend on policy implications. Considering the above, the government agenda should focus on making the country more attractive for FDI, especially in times of crisis when traditional determinants are put to the test and inspire proposals for new opportunities. Popovici, C. & Calin, A. (2012) note that the idea of entering a new era of determinants of FDI is not new as there are several studies that highlight the key factors for attracting FDI. This emphasizes that the classical theories of FDI probably should be changed and others should be based on the emergence of new local capacities. This research is divided as follows. In second part, a literature review is offered. Several research papers were analyzed to describe the key factors for attracting FDI considering classical theories in order to compare them with the determinants used by Mexico (Botello et al., 2015).Section three includes the data and variables used to explain the new determinant creation theory; based on the model proposed by Botello, et al. (2015) where the most relevant determinants used to obtain FDI are infrastructure, skilled labor, low labor cost, security, tax-break, natural resources, gross domestic product, legal system, geographical location and industrial policy. A probit model to test the theory in section four is presented. Finally, conclusions are discussed in section five. Literature review Latin America has undergone great economic changes. In 1982, the external debt crisis that affected the entire region exploded. Moreno, N. (2008) reported that this, generated capital flight and negative growth, which made that decade was considered "lost."At the same time, the economic policy of President Deng Xiao Ping helped make Latin America look very attractive to capitals from Asia, which allowed the arrival of volumes of investment, production and trade as well as the opening of multinational companies (Moreno, N., 2008). These were the beginnings of the flows of foreign investment in the region that originated the economic change that contributed to the stabilization of the crisis. After these events, positive changes began in the region; several contributions of Foreign Direct Investment (FDI) were made in the years 2005 to 2012. This contributed to a good and constant economic growth, since better investment flows were achieved like never before.FDI, in addition to be an opportunity for economic growth for each country, also means that it is one of the best and most effective ways to internationalize the region and make it a participant in globalization (Zapata, Y.; Kalmanovitz, S., 2007). Latin America, in general, has seen economic stability from 2005 to 2012 (which is the period studied in this article), with steady annual growth that indicates that each year the government strategies work best for attract new companies to these territories (ECLAC, 2005) but in recent years FDI in the region continued trending downwards. In 2017, FDI flows into the region stood at US$ 161.911 billion, 3.6% down on 2016. The main two reasons for the decline have been lower export commodity prices— which have led to a substantial drop in investments in the extractive industries— and the economic recession in 2015 and 2016, mainly in Brazil, albeit also in other South American economies. These two trends, however, were partially reversed in 2017, as commodity prices recovered and the region returned to growth (1.3%). Most of the literature related to the attraction of FDI by countries is based on different theories such as localization economies and their determinants, trade and resource endowments. In that sense, the eclectic paradigm of Dunning (1988) argues that the path FDI takes is partly due to the specific advantages which one country has, because of its regional geographic location and / or location in the world. These advantages arise from using resource endowments and / or assets held abroad by some countries in the world which are attractive to a company by combining them with its own resources. International Journal of Business and Economic Development, Vol. 6 Number 3 November 2018 www.ijbed.org A Journal of the Academy of Business and Retail Management (ABRM) 3 That combination suggests that if a foreign company wants to use the resources of a country, it should establish a subsidiary by initiating a flow of FDI and then establish a start-up operating facility (Hill, Ch., 2008) but, the risk is a main determinant that has to be considered. As of 2010, countries that wanted to invest in Latin America began to take an interest in the technology sector, but due to the low level of the industry, they took advantage of the opportunity to invest in low and medium-low technology (ECLAC, 2010).One of the sectors in which Latin America has been a recipient of investment from Europe is electricity, focused on the telecommunications, banking and energy subsectors (Zapata, Y., 2007). On the other hand, one of the main reasons why the European Union decided to invest in Latin America is the opportunity that this region offers to access new and distant markets. Within the contribution of the Colombian legal framework as an incentive to attract FDI, there is a whole process to remove the protectionist model that historically had, this process began in 1990. It wanted to propose an opening of international competition, beginning by adapting neoliberal tendencies, efficient allocation of resources and institutional changes begun in the government of former President Virgilio Barco and at the beginning of the mandate of César Gaviria, with whom they became official and put into practice. These new policies were based on principles such as economic freedom, foreign trade reforms, labor legislation, foreign exchange regime, foreign investment policies, among others (Ramirez, C., 2011). During the 2000s, the prohibition of FDI was eliminated in sectors that were previously not allowed and new financial, tax, labor, and port provisions were implemented in a positive manner, as well as an international investment statute. The law that stands out most is Law 963, made in 2005, under which investors will continue to be entitled to facilities and accessibility for them, under certain specifications imposed by the government (Ramirez, C., 2011). The elimination of infrastructure gaps plays a key role in sustaining strong and broad-based growth and supporting further economic diversification. Relatively weak road infrastructure represents an important obstacle not only for overall GDP growth, including through export diversification, but also for achieving a more evenly-distributed economic performance across regions in Colombia. In 2015,