Chile's Economic Growth

Decoding Chile's Economic Growth: How Foreign Investment and Local Capital Fuel Progress

Lena Kashyap in Business & Economy August 2025 • 4 min read.

"A deep dive into the interplay between foreign investment (IED) and domestic investment (IN) in Chile's economic engine, revealing strategies for sustainable expansion."

Economic expansion is a vital sign of any nation's advancement, and Chile, a leading light in Latin America, offers a compelling case study. Despite occasional setbacks, Chile's economy demonstrates consistent growth, making it an attractive subject for economic analysis.

Like the rest of the world, Chile's economy faced serious consequences from the pandemic of 2020. As one source details, "The coronavirus pandemic led to the largest GDP contraction in almost 40 years, of 5.8%, as a result of simultaneous shocks to domestic demand, external demand and supply." Understanding how Chile is recovering is key to understanding regional economics.

Investment is a major factor in Chile's economic growth. For this reason, it's important to analyze the effect of foreign direct investment (IED) and domestic investment (IN) as key parts of the country’s financial system. A key issue in this discussion is how IED competes with local capital.

How Do Foreign and Domestic Investments Interact?

Understanding the interplay between IED and domestic investment is essential for creating policies that support balanced financial expansion. In particular, the study highlights the significance of the theory of internationalization, widely used in examining IED. It serves as a theoretical basis for understanding why multinational companies choose to invest abroad.

Using data from sources like the Central Bank of Chile, the study examines variables such as Gross Domestic Product (GDP) as the dependent variable, foreign direct investment as a key independent variable, and domestic investment as another. The core research question is whether there's a long-term relationship between Foreign Direct Investment (IED) and National Investment (IN) and Chile’s Economic Growth (PIB).

Regression Analysis: Creating a linear regression model to establish a baseline understanding of the relationships.
VAR Modeling: Implementing Vector Autoregression to capture the dynamic interdependencies between the variables.
Granger Causality Tests: Determining if one variable precedes and predicts changes in another.
Impulse Response Analysis: Tracing how shocks to one variable affect the others over time.

The statistical analysis employs Eviews 6 to process time-series data, which will determine whether attracting foreign investment and boosting internal investment are both needed to achieve lasting growth in Chile.

Building a Sustainable Economic Future

In order to maintain lasting economic expansion in Chile, foreign investments must continue to be encouraged while simultaneously promoting internal investment. In addition, policies should be put in place to promote technology transfer and human capital growth, ensuring that the benefits of foreign investment are maximized. The econometric analysis offers a sound basis for policy development and decision-making that will promote the country’s financial well-being.

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Everything You Need To Know

What role did the pandemic play in Chile's economic performance?

The coronavirus pandemic significantly impacted Chile's economy in 2020, leading to a substantial contraction of 5.8% in its Gross Domestic Product (GDP). This downturn resulted from simultaneous shocks to domestic demand, external demand, and supply chains. Understanding the recovery from this period is critical to understanding Chile's economic resilience and its path to future growth.

How are Foreign Direct Investment (IED) and Domestic Investment (IN) analyzed in relation to Chile's economic growth?

The analysis focuses on the relationship between Foreign Direct Investment (IED), Domestic Investment (IN), and Chile’s Economic Growth (PIB). The study employs several econometric techniques. These include regression analysis to establish a baseline understanding, Vector Autoregression (VAR) modeling to capture dynamic interdependencies, Granger Causality Tests to determine predictive relationships, and Impulse Response Analysis to trace variable impacts over time. The data is processed using Eviews 6, which is used to analyze time-series data from sources like the Central Bank of Chile to determine if attracting foreign investment and boosting internal investment are both needed to achieve lasting growth in Chile.

What is the importance of the interplay between Foreign Direct Investment (IED) and Domestic Investment (IN) for Chile's economic policies?

Understanding the interplay between Foreign Direct Investment (IED) and Domestic Investment (IN) is crucial for formulating effective policies. This understanding helps in promoting balanced financial expansion and sustainable economic development. The analysis emphasizes the significance of the theory of internationalization, which explains why multinational companies choose to invest abroad, and provides a theoretical basis for analyzing the effects of IED on Chile's economy. By examining these relationships, policymakers can create strategies that encourage both IED and IN, contributing to Chile's long-term economic prosperity.

What specific econometric methods are used to assess the relationship between IED, IN, and Chile's Economic Growth?

The study utilizes a range of econometric methods to analyze the relationship between Foreign Direct Investment (IED), Domestic Investment (IN), and Chile’s Economic Growth (PIB). These include: regression analysis for initial understanding; Vector Autoregression (VAR) modeling to capture dynamic interdependencies; Granger Causality Tests to determine if one variable precedes and predicts changes in another; and Impulse Response Analysis to trace the effects of shocks to variables over time. These methods, processed using Eviews 6, allow for a detailed examination of how IED and IN influence Chile's GDP.

Beyond investment, what other strategies are recommended for fostering long-term economic expansion in Chile?

In addition to encouraging Foreign Direct Investment (IED) and Domestic Investment (IN), the study suggests the importance of promoting technology transfer and human capital growth. These elements are critical to maximizing the benefits of foreign investment and building a sustainable economic future. By focusing on these areas, Chile can enhance its capacity for innovation, improve productivity, and create a more resilient and prosperous economy. The econometric analysis supports policy development and decision-making aimed at boosting the country’s financial well-being.