Impact of Pension Privatization on Foreign Direct Investments: A Study of the Latin American Experiment

We explore the causal effect of market-oriented pension reform on net foreign direct investment (FDI) inflows in Latin America, which has experienced a wave of pension privatization and FDI in the last two decades. With our balanced panel of 17 countries over the 1991-2006 period, we implement fixed effects models, controlling for the endogenous decision to enacted full or partial privatization of the public pension system and several other covariates whose choice is informed by the rich empirical literature on FDI. Our econometric results indicate that privatization triggers a significant increase in net FDI inflows within a year of reform implementation and that the effect does not wane over time. We estimate that privatization increases FDI as a percentage of GDP by between 41 and 47%, ceteris paribus.