Reforming the IMF to Increase FDI Led Economic Growth : The Case of Latin American and Caribbean Countries

There is a strong body of literature that finds a direct connection between inward foreign direct investment and economic growth in the host country. At the same time, economic growth in the host country attracts additional Foreign Direct Investment (FDI). This bidirectional relationship can be supported by the IMF through its lending program to countries to assist in dealing with short-term shocks as well as managing more long-term structural issues. In fact, the IMF programs in theory should provide an indicator to potential investors that the country is committed to making a change and opening its economy, which are typical requirements under IMF conditions. IMF intervention should lead to a positive impact on inward FDI. This study examines the impact of IMF-support programs on inward FDI for a sample of Latin American and Caribbean Countries. The results from this study reveal that being on an IMF borrowing program has a negative impact on inward FDI in the second and third year. We argue that being on an IMF borrowing program does not provide inward FDI with the seal of approval that it requires in making an investment.


INTRODUCTION
In the post-1970s period, countries worldwide have moved from a hostile stance towards inward foreign direct investment (FDI) to one that is very supportive and intentionally positive.Inward FDI is no longer viewed as parasitic and hindering the development of domestic industries.Instead, inward FDI is considered to have several positive effects to the host country, which includes enhancements in productivity as a result of the introduction of new processes and knowledge, technology transfer, development of local industry, and access to overseas markets (see Bende-Nabende and Ford, 1998;Borensztein et al., 1998;Carkovic and Levine, 2002;De Gregorio, 2003).The prior literature on FDI has two main streams, namely, its impact on trade-related economic growth (Markussen and Vernables, 1998) and economic growth that takes place as a result of enhancing domestic capital through productivity improvements (Borensztein et al., 1998;Driffield, 2001).Whether through trade or productivity or both, there is a strong body of prior studies supporting the linkage between inward investment and economic growth (De Mello, 1997;Borensztein et al., 1998;Glass and Saggi, 1999).In fact, De Gregorio (2003) found that an increase of 1% of inward FDI increased economic growth in the host country by approximately 0.6%.
More recent studies have found that FDI is attracted to countries that have stable and growing economies.Therefore, the argument is that economic policy or growth stimulates inward FDI investment and with it the benefits that accrue from external finance.Economic policy can be assumed to be trade openness, regulatory environment, and labor market factors that attract inward investment (Fedderke and Romm, 2006).The outcomes of economic policy lead to increase in GDP, political and economic stability, and so forth (see Mateev, 2009).Other studies such as Porter (1994), and Dunning have argued that FDI is motivated by location-specific factors.These, in turn, are enhanced through economic policies that promote and encourage business-friendly conditions.For many countries, the implementation of sound economic policies is dependent on their ability to fund short-term shocks as well as longer period structural issues.Harms and Lutz (2006) report that the ability of the host country to finance outflows through an improvement of the balance of payments provided by organizations such as the IMF has a positive impact on FDI attraction.Similarly, programs that enhance the economic and social infrastructure of the host country funded by support HATASO merj.scholasticahq.comagencies such as the IMF increase the marginal productivity of external capital (Harms and Lutz, 2006;Kimura and Todo, 2010).Perhaps, the most important aspect of IMF involvement in a country is the fact that it indicates to inward FDI that the host nation has made a public commitment to comply with the conditions.This study examines the impact of IMF-support programs on inward FDI for Latin American and Caribbean countries (LAC).IMF-support programs have been helpful to countries that have experienced shortterm liquidity issues as well as longer period structural problems.However, critics indicate that the repeated usage of IMF-support programs may be indicative of their ineffectiveness in assisting borrower countries.More importantly, critics also indicate that being on an IMF-support program may actually make matters worse for the borrowing country.It is to understand these very issues that we select the LAC countries where there has been a relatively high incidence of IMF-support programs.In addition, the LAC countries have a mix of some very large and developed countries in the world along with small and weak economies.As such, we believe that this diversity allows us to have a better and deeper understanding of the impact of IMF-support programs on host nations and their efficiency in attracting inward FDI.

THE FDI ECONOMIC GROWTH LITERATURE REVIEW
FDI has a very long history.However, its importance has gained prominence in the post Second World War period coinciding with the development of the new corporate firm.Post war production has meant that firms have sought to exploit economies of scale that necessitate large consumer markets with multiple distribution channels.In addition, the growth of modern complex global value chains implies that FDI takes place in a variety of different forms from production to research and development.From a corporate viewpoint, FDI has allowed firms to invest in foreign countries in order to secure resources, benefit from cost efficiencies, acquire strategic assets so that they do not fall under the control of a competitor, extend the market share of the parent company, acquire technology, have access to particular skills, and in some cases financing.Therefore, it is not a surprise to see that currently FDI inflows are over US$1.7 trillion or approximately 3% of world GDP (OECD, 2016).
Academic research on FDI studies has identified a number of direct and indirect benefits to the host country.Perhaps, the most important direct benefit of FDI takes the form of an increase in the level of capital formation in the host country that then provides greater employment opportunities and a positive multiplier takes place.Balasubramanyam et al. (1996) and Kohpaiboon (2003) find that economic growth in host country takes place when pro-export policies are adopted.Where the host nations implement import substitution policies these studies find a positive but weak impact to the economy.Similar results were found by Basu et al. (2003) as well as Trevino and Upadhyaya (2003) who indicate that trade openness as being an important factor that leads to FDI-induced economic growth.Borensztein et al. (1998) as well as Jyun-Yi, Wu, and Hsu Chin-Chiang (2008) find that FDI has a positive impact however its size depends on the quality of the human capital in the host country.Olofsodotter (1998) finds that FDI has a large impact on economic growth through technology transfer which is substantially stronger when the host nation has laws and regulations that protect intellectual property rights.Wu and Hsu (2008) find that FDI has a considerably stronger impact on economic growth when the host nation has a higher level of initial GDP and human capital.At a sectoral level, Wang (2009) found that the impact of FDI on host country economic growth was higher when the inward investment was in the manufacturing areas.

THE ROLE OF THE IMF IN FACILITATING ECONOMIC GROWTH
In order to understand the linkage between the IMF programs with economic growth and FDI, it is important to appreciate its role.The functions of the IMF were agreed during the meetings that took place in Bretton Woods in 1944 as follows: (i) Surveillance function, which (Bordo and James, 2000) claims at "promoting world trade, and securing the general well-being of the world economy, through analysis and advice." The surveillance function can be divided into national country performance reporting and policy dialogue.
Meanwhile, the latter focuses on having periodic dialogues with member countries in order to enhance their policy decisions.(ii) Providing credits or the ability to make drawing by member countries.Typically, the credits are made in tranches of 25% of a member's quota.(iii) Provision of subsidized credit, which was initiated in the 1970s to assist low-income countries that were adversely affected by the increase in oil prices.The costs of the credit subsidy are funded by a trust fund established in the 1970s along with donations and loans from rich member countries.(iv) The creation of Special Drawing Right (SDRs), which are not technically a currency but represent a reserve asset and held by IMF member countries (IMF, 2014a).(v) Data, which are the collection and dissemination of country level information in a standardized manner.(vi) Training and technical assistance, which is aimed at increasing the capacity of some of the weaker members.
Among all the above functions, two functions are of relevance for this study, namely the provision of credits and subsidized loans.There are a number of different ways in which loans are provided to member countries and are as follows: (i) Stand-by Arrangement (SBA), which was initiated in order to assist countries with their balance of payments issues.Although, the borrowing rates for this credit facility are lower than commercial rates, nevertheless it is considered as a non-concessionary loan.Typically, SBAs are for a year to two years with a limit set at three years.Repayment typically takes place in three to five years after the drawdown of the loan (IMF, 2014b).(ii) Extended Fund Facility (EFF) like the SBF is also developed to assist countries with their balance of payments problems.However, different from a SBA, an EFF is intended for a longer maturity of between four and ten years and seeks to deal with more complex structural problems that usually may take more time to redress than macroeconomic imbalances.As a part of this program, the IMF seeks to address the country level rigidities in markets and institutions and promote the privatization of state-owned enterprises as well as reforming the financial sector.The SBA and EFF are the main sources of IMF programs for balance of payments issues.(iii) Flexible Credit Line (FCL) was developed for member countries that have a good record of policy enactment.As such, the IMF does not impose any limits on the loan size or conditions for drawdown.Typically, a FCL extends for one to two years and repayments are made over a three-to five-year period (IMF, 2014b).(iv) Precautionary and Liquidity Line (PLL) was developed to meet the short-term liquidity requirements of countries that cannot utilize the FCL.The PLL is for a period of six months to two years with a two-year cooling-off period (IMF, 2014b).(v) Rapid Financing Instrument (RFI) provides a quick solution to countries that need to resolve more pressing balance of payments issues.Typically, RFI is paid over three to five years.(vi) Trade Integration Mechanism (TIM) was developed to assist member countries dealing with balance of payments issues related to recently implemented trade liberalization measures.(vii) Extended Credit Facility (ECF), which replaced the Poverty Reduction and Growth Facility (PRGF), is intended for member countries that have more extensive balance of payments problems issues.
The ECF offers more concessional and flexible financing terms typically at zero interest rate and payment to start five years after the drawdown.(viii) Rapid Credit Facility (RCF) is a facility intended for low-income member countries with little in the way of conditionality and intended for urgent balance of payments problems.Similar to the ECF, the RCF has a zero interest rate, and payments start five years after the drawdown.(ix) Standby Credit Facility (SCF) is intended for low-income countries that experience short-term shocks.
As such, it is intended for one-to two-year maturity with an interest rate that is typically at 0.25%.The repayments do not need to start until four years from maturity and can extend to 8 years.
The common thread among all the credit arrangements is to assist member countries to deal with balance of payments issues and help foster economic growth.The IMF has a number of channels to influence economic growth within a member country.In the simplest form, the IMF credit is expected to resolve shortand long-term issues in the economy.However, this viewpoint has been challenged by prior studies such as Boockmann and Dreher (2003) who argue that the receipt of an IMF loan leads the distressed country to assume that the problem has been resolved while this may not be the case.In fact, they argue that it reduces the incentive to carry out changes that may reduce their incentive to reform.Bandow (1994) argues that such a misconception allows the distressed country to continue with existing or misguided policies longer than necessary.Evrensel (2002) finds that budget deficits, inflation rates, and domestic credit tend to be worse in second lending programs compared with the first one.Conway (1994) finds evidence of repeated participation in an IMF lending program rather than one-off assistance.Dreher and Vaubel (2004) showed that economic policy is undeniably more expansive in countries with higher IMF loans available, when compared with the country's undrawn quota with the fund.If the hypothesis that IMF induces moral hazard and bad economic policy is true, then the effect of all this would be the reduced growth (Dreher, 2006).
Perhaps, the most damning criticism of the IMF relates to the conditions that it places on its loans.The IMF conditions seek to bring about changes in the borrower country's economic policies in return for the provision of financial assistance.In theory, the IMF conditions are designed to be a balance between bringing about change yet seeking to ensure the borrower country is able to repay the loan.However, prior studies (see Bird, 2001;Meltzer, 2005) argue that the IMF imposes the same conditions on all borrowers and this "one size fits all" methodology is inappropriate and ineffective.Dreher (2006) argues that owing to the inappropriateness of the IMF conditions, there is a high level of noncompliance and, with it, little positive impact on the economy of the borrower country.One manner in which to enhance economic growth may take place through IMF support is through its technical assistance program (Boockmann and Dreher, 2003).Fischer (2001) claims that the real benefit of the IMF's technical assistance is the long-term benefit from getting countries to think and implement economic policy in a certain manner.As a result, studies such as Dreher (2006) claim that the IMF has a positive impact on economic growth regardless of its conditionality regime.
Prior studies examining the impact of IMF programs on economic growth have employed three different methodologies.The first method is the before-after analysis that considers the levels of economic growth before and after an IMF program has been agreed.The obvious problem with this methodology is that a country entering into an IMF program is experiencing difficulties.Moreover, the benefits may not be immediate as policy actions may take time to materialize (Dreher, 2006).The second method is to compare the countries in the IMF program to a pool of benchmark nations.The idea is that any shock will affect both the borrowing nations as well as the benchmarks.However, the obvious problem is that of identifying an appropriate pool of countries that can serve as a benchmark.The third method is to use statistical techniques such as regression analysis.Przeworski and Vreeland (2000) report that a country's participation in an IMF borrowing program has a negative impact on its economic growth.The study finds that countries on the IMF program experience an economic growth that is on average 2.5% lower than countries not on the IMF program.
From an inward FDI perspective, being on an IMF program should have a positive impact for the borrowing nation as it provides potential investors with a clear message that the country be committed to conducting economic and financial reforms as directed by the IMF.Corsetti et al. (2003) argue that the provision of liquidity by the IMF allows private investors to roll over their debt.Bauer et al. (2012) find that being on an IMF program has a positive impact on inward FDI only for democratic countries while it has a negative impact in the case of autocratic nations.van der Veer and de Jong (2013) find that inward FDI has a positive bias toward nations that do not default on their IMF obligations.On the other hand, Jensen (2004) finds that being on an IMF program results in a negative impact on inward FDI equivalent to 25% less nations not on the IMF program.Other studies such as Edwards (2006) find that being on an IMF program leads to capital flight.Bird and Rowlands (2007) find that the impact is dependent on the level of debt and negative impact for those with medium to and high levels of indebtedness.On the other hand, for countries with low levels of debt, there was a positive impact on inward FDI.
Table 1 lists the LAC countries along with their membership of the IMF and the number of programs that they have undergone.It appears that the average LAC country became a member of the IMF in 1945 and has over this period received loans under 12.5 different programs.

TRENDS IN FDI IN THE LAC COUNTRIES
Statistics produced by UNCTAD (2017) show that global FDI has experienced a mixed picture over the last decade.There was a period of growth until the International Financial Crisis in 2007 recovering slightly from 2010 onwards.However, the weak global economic performance and very low levels of growth in international trade have dampened FDI flows.Developing countries have experienced the sharpest decline in FDI inflows as from 2015.The regional FDI inflows in 2016 compared to 2015 shows Europe to have experienced the greatest decline at 29% followed by developing countries in Asia and Oceania at 22% and Latin America and the Caribbean (LAC) with 19%.Interestingly, transition economies experienced an increase in FDI inflows of 38%, as did North America and other developed nations at 6 and 139%, respectively.Over the last 25 years, the LAC region has experienced two periods of an increase and one decline in FDI.The periods of increase were from 1990 to 1999 and then 2003 to 2011 while the decline took place between 1999 and 2003.
Overall, FDI inflows into LAC have tended to be approximately 3.5% of GDP; however, the distribution is not equal and with 2.5% of GDP for Mexico and 10% for both Chile and Panama.In addition, the volume of FDI is not equal and heavyweight economies such as Brazil account for 42% of all FDI inflows into the LAC region.
The main source of FDI inflows into the LAC region is the United States accounting for 26%.However, in the case of some LAC countries such as Mexico, the United States is an important investing nation accounting for 52% of the investment inflows.Other important investing nations into the LAC region are the Netherlands at 16% and Spain with 12%.At a country level, Brazil is not only the largest economy in the LAC region but the greatest recipient of FDI inflows with US$96,895 billion in 2015 compared to US$ 75,075 billion in 2014.Way behind Brazil come Chile, Colombia, and Argentina.The Central American region experienced an increase of 6% in FDI inflows with Panama being the most important accounting for 43% of the subregional figure.Other significant subregional recipients are Costa Rica at 26%, Honduras at 10%, and Guatemala with 10%.Interestingly, four countries account for approximately 90% of the subregional FDI inflows.The Dominican Republic is the largest recipient of FDI inflows within the Caribbean subregion at 39% of the total followed by Trinidad and Tobago at 20% and Jamaica at 13%.These three countries account for three quarters of all the FDI inflows into the subregion.

DATA AND METHODOLOGY
This study employs annual data for the 31 LAC countries over the period 1993 to 2015.We have excluded Cuba as it left the IMF in 1964 and Antigua and Barbuda because it is not a member.Country-level data are obtained from the World Bank's World Development Indicators database. 1To examine the link between FDI flows and IMF lending programs, we estimate the following model: where FDI flowsi,t is the measure of FDI flows; IMF programsi,t is a dummy variable used as proxy for the existence of an IMF lending program; to incorporate the lag impact we also use t 5 1 and t 1 2, Control Variablesi,t is a vector of controls, ei,t is an error term; i 5 1, …, N represents the country; and t 5 1, …, T represents time.Finally, a is the coefficient of interest to us, and it measures the effect of IMF programs on FDI flows.
Consistent with prior literature, our main dependent variable is FDI flows which is measured in US$.The World Bank's definition of FDI is "the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor" (World Bank, 2015).Table 2 provides an overview of variables employed in this study whereby the presence of an IMF facility is represented by a dummy variable equal to one if a country (i) has had an arrangement in effect for at least 5 months in a particular year (t).We argue that the impact of an IMF arrangement on FDI may not be immediate and can take up to three years; therefore, we also use a dummy variable for the HATASO merj.scholasticahq.comlag years 2 and 3, which has the same value as year 1.We focus our attention on the key programs namely the Stand-by Arrangement (SBA), the Extended Fund Facility (EFF), the Extended Credit Facility (ECF), the Precautionary and Liquidity Line (PLL), and the Flexible Credit Line (FCL).
We appreciate that, being on an IMF program is an important indicator for inward investment however to incorporate the complicated nature of FDI decision-making within a modern firm, we also incorporate certain control variables.Our literature review highlights the importance of trade openness, and therefore we use a measure of trade restrictions in the form tariffs.This is a charge on the quantity of the product imported into the host nation.Tariffs are imposed to generate revenue but more commonly to protect the domestic industry (Gamberoni and Newfarmer, 2009).With the presence of tariffs, exporting to the country may become expensive and uncompetitive.Hence, FDI may be motivated to bypass these restrictions and establish a presence in the host country.This form of FDI is often referred to as tariff jumping FDI.Blogigen and Figlio (1998) and Blonigen (2002) among others find evidence to support tariff jumping FDI to take place.
A key consideration for inward investment is the rate of return on an investment after taxation.An early study that examined the impact of taxation on FDI was by Hartman (1984).Moreover, this study looked at after-tax rate of return on US investment for foreign investors, the gross rate of return on investment after United States, and the relative tax rates between host countries.The study found a strong and positive impact of the tax rate on FDI.Similar results were found by Boskin and Gale (1987), Young (1988), Murthy (1989), Grubert and Mutti (1991), Hines and Rice (1994), Gorter and Parikh (2000), and Benassy-Quere et al. (2001); all find evidence to show a statistically significant impact of tax on FDI.Any form of FDI involves the process of converting currency from the home country to that of the host nation.As such, an important consideration for FDI is the current conversion rate as well as the volatility of the future repatriation of profits.Froot and Stein (1991), Stevens (1993), and Blonigen (1997) find that a depreciation in the host country exchange rate increases the level of FDI.However, this also impacts the future profits.Moreover, Campa (1993), Tomlin (2000), and Chakrabarti and Scholnick (2002) find that a depreciation in the host country currency reduces the level of FDI.Chen et al. (2006) examines not only the level of FDI but also the motivation namely market-oriented that is to capitalize on the market size of the host nation and cost-oriented FDI that seeks to benefit from lower costs in the country.Chen ( 2006) finds that expected weakening in the host country currency exhibits a negative impact for market-seeking FDI, whereas it was positive for cost-oriented investment.
The data for this study cover the period 1970 to 2013, and the summary statistics are presented in Table 3.The LAC countries show a wide contrast in FDI experience with inflows of over US$100 billion with capital flight approaching US$2 billion.The mixed performance is representative of the huge diversity between the 31 countries as well as the experiences over the 43 years from 1970 to 2013.The diversity of economic experience is illustrated in the inflation data whereby some countries have undergone periods of hyperinflation.As a result, the mean value for the LAC countries is relatively high; however, the mode figure at 7.7% is more respectable.Evident within the LAC countries is the relatively high levels of tariffs at 41%, with the maximum value at 78% and the minimum value at 17.61%.It appears that the LAC region is very trade protective.In the case of taxation, the LAC region is very diverse with maximum rates of 72% and a minimum value of 3.17%.The average taxation rate for the LAC countries is 27%.

RESULTS AND DISCUSSION
Table 4 presents our results from the multiple OLS regression for the 31 LAC countries over the period 1970 to 2013.Our results reveal that participation in an IMF to have a positive but not statistically significant impact on inward FDI.Therefore, we find evidence to support our hypothesis.However, it is not statistically significant.Interestingly, the lag terms for IMF participation in year two and three are negative.This implies that FDI inflows have a negative impact once a host country embarks on a borrowing program.As such, we do not find evidence to support our second and third hypothesis.Although, the results are not statistically significant, they indicate that potential investors negatively view a country that is on an IMF program.As such potential investors feel that being on an IMF program is likely to lead to greater uncertainty and possibly a repeated borrowing by the host nation.We believe that the negative impact of being on an IMF program on FDI occurs regardless of whether the host country agrees to comply with the IMF conditions and reform their economies.We believe that potential investors are risk averse and hence may actually take capital out of a country if it participates in an IMF program on the belief that the economy will become worse before it improves.During the difficult period before the economy improves, investors may wish to relocate their capital.
We believe that a fundamental weakness within the IMF borrowing program is that it provides a negative signal to private investors.To a large extent, private investors are justified as in Table 1, which illustrates that some LAC countries have been on 27 IMF borrowing program over a 60-year period.Therefore, there is a very high probability that being on an IMF borrowing program will lead to a repeated admission.In fact, every single country that participated in an IMF borrowing program in Table 1 has repeated this at least once.Therefore, it is felt that the IMF program does not deal with the core problems within the country that allow them to be self-reliant.More importantly, the reforms that are required by the IMF should not be conducted in vacuum but in consultation with inward investors.As stated above, FDI accounts for 3% of global GDP.
Therefore, it has the potential to make a significant and positive contribution to the host nation.In addition, the literature review that has been presented shows the positive impact of FDI on host country GDP.Therefore, the IMF conditions should ensure that inward FDI is encouraged as a part of the lending criteria.We believe that the performance metrics used by the IMF in order to make the next tranche of payments should be adapted so that it considers the actual performance as experienced by the private sector.We believe that policy actions undertaken by the host nation are reflected in the business conditions that are experienced by private sector investors both domestic and international.Therefore, the performance metrics should include trade openness, which according to our literature review positively impacts the host country.In addition, our results in Table 4 reveal that high tariffs have a negative and statistically significant impact on FDI.This implies that inward FDI does not positively value host nations that are protective over their domestic industry.Instead, inward FDI looks for economies that encourage competition and have low tariffs.
We find high inflation to have a negative impact on FDI and that reflects the fact that investors prefer a higher level of predictability.We also find that a stable and strong exchange rate exhibits a positive and statically significant impact on inward FDI.We believe that inward investors take a long-term view and are concerned not only regarding the rate that the initial investment is made into the host nation but also when profits will be repatriated to the home country.Therefore, the greater the exchange rate certainty the higher the likelihood of inward IMF.In theory, inward investors can use financial markets to hedge their exchange rate exposure.However, two issues arise, namely the time period of the financial hedge as well as its cost.Second, for hedging to be conducted through financial markets, the company should be able to state the value of local currency that needs to be converted.However, for most part, this value is not known and depends on market conditions.Therefore, currency hedging through financial markets is not always an option for investors.
Finally, we find that high taxes do not deter inward investors, and actually there is a positive relationship that is statistically significant.We believe that this relationship may reflect the fact that the mean value at 27% is lower than many other non-LAC countries.Second, the existence of double taxation agreements allows investors to offset tax paid in one jurisdiction with that of another.Typically, double taxation ID: 522256 https://doi.org/10.18639/MERJ.2018.04.522256 agreements have the credit or the exemption concept.In the case of the former, tax paid in one jurisdiction can be offset when repatriated to the home country.In the case of the exempt criteria, the income for which tax has been paid in one jurisdiction is exempt from any further levies in the home country.Both types of double taxation agreements provide investors an advantage; whereas, in many cases, the exempt criteria may be better.

CONCLUSIONS
The LAC countries have experienced two periods of relatively high inward FDI namely during the 1990s and then prior to the international financial crisis.However, among the 31 LAC countries, we find that heavyweight nations such as Brazil account for 42% of all inward investment.In addition, as far as the investor nations is concerned, the inflows into the LAC countries is highly concentrated with three countries namely the United States, the Netherlands, and Spain accounting for 80% of the total value.In part, this is reflected by the geographical proximity, historical ties, and language.The objective of this study was to examine the impact of a country being on an IMF borrowing program on its FDI inflows.The traditional arguments are that being on an IMF program should provide investors with a positive message that the country is reforming as well as making data and policy more transparent.However, this study has found that in the year of being on the program, the FDI inflows remain positive but there is a negative impact in the second and third year.Therefore, we find that investors are acutely aware that being on an IMF borrowing program will lead to a repetition of this and hence view it negatively.As such, we argue that the IMF does not deal with the core problems that do not make the host nation selfreliant.Therefore, we argue that the IMF borrowing program should be reformed so that policy objectives are not developed in a vacuum but in consultation with inward investors.We believe that inward FDI is a very important stakeholder in any policy reforms that the IMF recommends.Second, we argue that the IMF performance metrics that are used to decide on whether the next trance of funds are made available should include issues that are important to the business community both domestic and international.Finally, we believe that the power of inward FDI is understated to bring about a positive impact to the host country and its economic growth.Therefore, we argue that IMF policy reforms should be centered on those aspects that attract inward FDI.Our findings show that being on an IMF borrowing program does not provide inward FDI with the seal of approval that they require for an investment.

Table 1 . List of LAC Countries and Number of IMF Programs since Joining.
implies that for half the membership period an average LAC country has been under an IMF program.For some LAC countries, the experience has been far worse with the highest number of programs at 27 for Haiti.The most common number of programs has been 16 while the median is 15.On the other extreme, only three of the 31 LAC countries in the sample have not participated in any type of IMF borrowing arrangement.Interestingly, these three countries are very tiny islands of Bahamas, Saint Vincent, and Saint Lucia.Table1shows no relationship between the length of IMF membership and the number of financing programs that a country conducts.Similarly, there is very little relationship between the GDP or the GDP per capita and the number of IMF arrangements that have been initiated.It is interesting that Haiti with a per capita GDP of US$902 has initiated 27 IMF programs, whereas Uruguay with a per capita GDP of US$16,638 has 22 arrangements.The two countries are with very different per capital GDPs but rather similar number of IMF borrowing programs.Based on our discussion of the literature and the rationale of the IMF lending programs, we argue that IMF participation should have a beneficial impact on the host country and thus should lead to a greater level of FDSI inflows.As a result, we develop into testable hypotheses for the LAC countries in the following manner:Source: https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/weorept.aspx for nominal GDP data and http://www.imf.org/en/Countries/ARG for date of joining the IMF and programs.Note: Cuba is excluded as it voluntarily left the IMF in 1964 and Antigua and Barbuda, because it is not a member of the IMF.
If a typical program is of a three-year ID: 522256 https://doi.org/10.18639/MERJ.2018.04.522256 3.1.Development of Testable Hypotheses Participation in an IMF financing program do not have a positive impact on the level host country FDI inflows two years after the start of the arrangement.