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IMF Staff Papers Vol. 57, No. 2 2010 International Monetary Fund 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-indifferences),as well as to endogeneity and
omitted variables concerns.
Introduction
• direct investment (FDI) is an important component of financial globalization. Although the literature still lacks consensus on the benefits of financial globalization, FDI is believed to be one of the most important channels through which those benefits are delivered. • FDI is also considered to be the least volatile form of capital flows making countries less vulnerable to sudden stops. • many countries consider attracting FDI. Thus, an important policy question is what factors drive FDI to particular destinations. • This paper attempts to revisit the question on the determinants of FDI inflows with a novel focus on the role of structural reforms. • We construct a panel data set for 19 Latin American countries and 25 transition economies from 1989 to 2004. • In both regions, massive structural reforms were undertaken in this period. In most countries in the two regions, financial markets were liberalized, trade barriers were greatly reduced, and stateowned enterprises privatized. • Our main finding is that of a strong relationship from • Among the structural reforms considered in the study, we find a stronger effect on FDI from financial sector reforms liberalization, suggesting that foreign investors do value highly a host country’s financial system that is able to allocate capital efficiently, monitor firms, ameliorate, diversify and share risk, and ultimately mobilize savings. Literature Review
The literature indicates • that the key locational determinants are the classical sources of comparative advantages of the host country. Firms choose the investment site that minimizes the cost of production. • Greater macroeconomic and political stability of the host country could attract more foreign investment. • FDI and trade openness can be positively related. Data and Measurement
• The data set covers 19 Latin American and 25 commercial bank assets and central bank assets. • Average tariff rates. • Tariff dispersion. • Privatization proceeds from the world bank • rule of law, • quality of bureaucracy, • and executive constraints Polity IV (2002) and the International Country Risk Guide (ICRG). Econometric Model
• This study draws on the existing literature on the • OLS (with fixed effects), • GMM (system), • DID (difference in difference): sensitivity Empirical Results
• Applying regression techniques (Different • Present your results in tables and discuss them Conclusions
• In this paper we construct the new data set on structural reform indices for 19 Latin American and 25 transition economies from 1989 to 2004. • provide a more comprehensive assessment of these links by asking which reforms matter vis-a` -vis FDI and whether the effects of individual reform efforts differ in systematic ways. • Our main finding from the regression analyses is a robust empirical relationship from structural reforms to FDI. Also, we find a stronger effect from financial sector reforms than from privatization and trade liberalization. • We highlight three extensions of our study.
First, one could further extend the analysis to re-investigate the
long-term effects of FDI on growth after taking into account structural reforms. Second, it would be interesting to assess whether our findings hold as well for developed and for other groups of developing countries. Third, as previously mentioned, the choice of structural reforms can be extended to have a broader coverage such as labor market and product market liberalization, tax policy, as well as changes in the regulatory framework. Appendices
• I- Data on Structural Reform Indexes • II- Summary Statistics • III-Data Description and Sources Put everything done related to the work and is not necessary to be in the main text. References
• Use one which is consistent with the journal • The most applied is AER and Harvard style.

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