Impact of Pension Privatization on Foreign Direct Investment

Abstract

Summary We explore the causal effect of market-oriented pension reform on net foreign direct investment (FDI) inflows in Latin America and among the transitional economies of Eastern Europe and Central Asia, both of which have experienced waves of pension privatization and FDI over the last two decades. With our balanced panel of 42 countries over the 1991–2006 period, we implement fixed effects models, controlling for the decision to enact 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 pension privatization triggers a significant increase in net FDI inflows and that the effect does not wane over time. We estimate that full privatization increases FDI as a percentage of GDP by about 57%, ceteris paribus.