^*Nauro F. Campos is a professor at Brunel University. Yuko Kinoshita is an economist with the IMF's European Department. The authors are grateful to Leslie Armijo, Stijn Claessens, Enrica Detragiache, John Earle, Saul Estrin, Robert Flood (the editor), Aart Kraay, Rolf Langhammer, Branko Milanovic, Elias Papaioannou, Koen Schoors, Gabriele Tondl, three anonymous referees, and seminar participants at the AEA Meetings (New Orleans), ELSNIT Conference (Barcelona), IMF Conference on Causes and Consequences of Structural Reforms (Washington), and the WIDER CIBS2 Conference (Rio de Janeiro) for valuable comments on earlier versions. The authors also thank Sunita Kikeri and Marcelo Oleorraga from the World Bank for assistance with data on privatization and trade, respectively, and Mark Parrett for superb research assistance.

Abstract

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.