Structural Reforms, Financial Liberalization, and Foreign Direct Investment

The relationship between structural reforms and foreign direct investment (FDI) inflows is complex because different reforms have different impacts and because their complementarities have important yet imperfectly understood effects on FDI inflows. The objective of this paper is to try to extricate these effects, focusing on the dynamics of privatization, trade, and financial liberalization in a large yearly panel of developing countries (Latin America and transition economies) for the period from 1989–2004. The main finding is that of a strong relationship of reforms to FDI and, especially, of financial liberalization. We subject our results to various sensitivity tests and find they are robust to different measures of reforms, split samples, panel estimators (fixed-effects, system generalized method of moments, and differences-in-differences), as well as to endogeneity and omitted variables concerns.