Reforming Property Rights Institutions in Developing Countries: CanFDIInflows Help?

Abstract

This paper analyses factors that can facilitate property rights institutions reform in developing countries (DC). Inspired by the works ofNorth andWeingast (Journal ofEconomicHistory, 49, 1989, 803) andAcemoglu et al. (AmericanEconomicReview, 95, 2005a, 546; 2008) relating to the process of institutional reforms inEngland during the seventeenth century,Iassume thatFDIinflows could contribute to property rights reform inDCthat are initially endowed with a minimum of effective institutions of constraints on the executive (i.e. effective institutions of checks and balances). Using five‐year panel data over the period 1970–2005 with a sample of 80DC, and after correcting for endogeneity,Ifind that conditioned on the initial level of constraints on the executive, the effect ofFDIinflows on the probability of reforming property rights is positive and significant. The minimum level of constraints on the executive necessary for the catalytic role ofFDIinflows in reforming property rights institutions is 3.6. Only 20 out of the 80DCin the sample have this minimum level of constraints on the executive. Among the 20 countries five are in sub‐SaharanAfrica.