Foreign Investor Participation in Privatizations: Does the Institutional Environment Matter?

Foreign direct investment in developing countries has recently received a renewed attention as a major determinant of financial development. Indeed, where markets are financially constrained, foreign investment offers a viable financing opportunity assorted with a transfer of technological and managerial know-how. In this paper, we examine the determinants of foreign investors’ participation in the privatization process in developing countries, with a particular emphasis on the role of the legal and institutional environment. Our results show that foreign investors’ participation is conditioned by an investor friendly institutional environment, where minority investors’ rights are protected and laws are enforced. Furthermore, foreign investors prefer high growth economies where social stability prevails and where the risk of outright contract repudiation by the government is lower. Larger firms privatized through private sales at more recent stages appear to be most valued by foreign investors. Alternatively, nor the restrictions on foreign ownership, nor the residual ownership by the government in the privatized firm, seem to have a consistently significant effect on the extent of ownership held by foreign investors.