Replication Data for: Foreign Direct Investors: Agents of Economic Transition An Instrumental Variables Analysis

Article, Online Appendix, and Replication MaterialsPublished in QJPSPrevious empirical analysis has noted a correlation between Foreign Direct Investment (FDI) and economic reform in Eastern Europe and Former Soviet Union, but has attributed the relationship to investors rewarding countries after reform decisions. Little attention has been paid to the fact that investors’ lobbying efforts may actually influence reform choices. This paper finds a positive effect of FDI on reform progress through a panel analysis of investor influence in twenty-seven transition states (1991-2004). To address endogeneity bias, the exogenous portion of a country’s exchange rate movement is used as an instrument in a two-stage procedure. The underlying counterfactual comparison that results from this approach is between two similarly situated countries, but where one country experienced a large shift in the share of FDI in its economy as a result of changes in the international economy and the other did not. Further analysis reveals the relationship is particularly strong in the manufacturing and service sectors, but does not hold for construction, utilities, or natural resource based projects.