Economic Reforms and Inflows of Foreign Direct Investment in Latin America

Abstract

This paper seeks to explain the effect of different economic reforms for attracting foreign direct investment (FDI) in Latin America. Controlling for macroeconomic and good governance factors, we find that governments that implement economic reforms are not always more likely to attract FDI inflows. Instead, attempts to minimize expropriation risk complement domestic financial and trade reforms, which enhances foreign investor interest. Elements of both good governance and reform are important. The results provide reasons for optimism—the fact that most economic reforms are not essential for attracting FDI suggests that countries seeking FDI will encounter fewer obstacles.