Foreign Investor Participation in Privatizations : Does the Institutional Environment Matter?

Using a two-stage estimation procedure, we examine the determinants of foreign investors' participation in the privatization process of developing countries, with a particular emphasis on the role of the institutional environment. First, we estimate the probability that foreign investors target privatized firms in a given country. We show that an investor-friendly institutional environment which protects shareholders' rights favors foreign investors' participation. Foreigners also prefer large firms from high growth economies and socially stable countries with low political risk. Second, we restrict our analysis to those firms that foreign investors actually choose. We show that the use of private sales is a key determinant of foreign investors' stake in a privatized firm