Promoting investment in small Caribbean states

Abstract

This study performs an econometric analysis to determine the main policy levers for investment promotion in the Caribbean. The results provide the following policy advice to Caribbean policy makers seeking to increase investment in, and hence the growth prospectives of, their countries. 1. Investment, both foreign and domestic, is higher in countries that are open to international trade. Our results also suggest that Caribbean countries might see a greater effect of trade integration than other countries. Caribbean governments should therefore pursue regional trade arrangements, and actively support the WTO process of global trade liberalization. 2. Investment, both foreign and domestic, is higher in countries whose domestic markets are larger and more advanced. Regional integration to expand what is considered the domestic market, is thus beneficial. 3. Investment, both foreign and domestic, is higher in countries with greater political stability. To inspire confidence among investors, Caribbean countries should avoid major political disruptions, by pursuing inclusive and participatory policies. Our results suggest that investment is particularly responsive to stability issues in countries like Haiti, Guyana, Dominica, and Grenada. 4. Foreign investors are discouraged by bad macro-economic policies, poor infrastructure, and excessive regulation. Caribbean countries should avoid periods of high inflation and large debt burdens, and develop functional infrastructure and regulatory frameworks.FDI (Foreign Direct Investment Domestic investment Small states Caribbean