1. Discussion Nauro Campos/ Yuko Kinoshita Foreign direct investment, structural reforms, and institutional quality: Panel evidence from Eastern Europe and Latin America Gabriele Tondl University of Economics & BA, Vienna

2. Contribution Investigate determinants of FDI in emerging markets –  results can guide policy makers what to change to become attractive for FDI Country sample: –Latin America –Period 1989-2004 –Countries ranked 2nd (LA), 3rd (TE) among developing countries for FDI inflows –Transition, overcome macroeconomic instability, big structural reforms Hypotheses and model specification –FDI-types: market seeking, resource seeking –Location factors : Macro stability Infrastructure Institutional quality Structural reforms: financial sector, privatization, trade liberalization

3. Contribution II Indicators for structural reforms –Reform policies versus reform outcomes –Careful selection and construction of reform indicators: –Financial reform index 1 = development of financial market –Financial reform index 2 = efficiency of financial system –Trade liberalization: tariff rates + tariff dispersion –Privatization: receipts of government from disinvestment Convincing results: –Robust coefficients: income level (+), inflation (-), telephone lines (+), fuel exports (+), quality of bureaucracy (+), financial efficiency, privatization

4. Comments Motivation of sample selection? –Why Latin America and Transition countries? What do they have in common what divides them? Common: Macroeconomic stabilization, privatization, liberalization in both regions Common: Weak institutions in both regions BUT: Different: Transition economies major experienced major drop of economic activity, major share of outdated productions creates a full range of investment opportunities not the case in LA Different: TE were completely isolated before 90s, LA not –Both LA and TE ranked below Asia for FDI inflows, why not compare them with Asia?

5. Comments II Model for FDI determinants: –Missing factors: –Labour costs: TE served for low wage productions for EU investors, at least temporarily, Central America serves for low wage productions of US investors. –Education: literature stressed its importance for investors education is expected to differ a lot in both regions, some TE have quite high education. Maybe try alternative education indicators, e.g. share of 25 years old with English knowledge –Countries belong to different trading blocks, e.g. EU association, Andean Community, Mercosur, may have influence on investment –Not only present trade openness may be important, also years of openness

6. Comments III Sample: Explanation why certain countries from region are missing: –only 3 Caribbean – why not have only Central and South America? –Balkan countries not included – data problems? Estimation method system GMM: –Why use the estimator system GMM? –Which variables are considered to be endogenous? –Which are the arguments (literature) why they should be endogenous? –Which instruments are proposed in the literature –Instruments: Can the instruments used with system GMM be considered to be suitable instruments? Are lagged values valid instruments? In developing countries series show big changes. Lags of more than t-1 are often poorly correlated with variable. –Econometric problem non-stationarity: –A number of series can be considered to be non-stationary (typical in developing countries) – GDPp.c., infrastructure, trade liberalization, etc… –Explanation if system GMM is appropriate in this context

7. Comments IV Results: –Instruments are not explained: for which series IV –What lag length was used? How was lag length of instruments determined. –Explain which options were used for estimation: e.g. one-step or 2-step estimates –Explain the test statistics