The three pillars of institutional theory and FDI in Latin America: An institutionalization process

This paper describes the process of institutionalization and legitimization in countries in Latin America and its impact on organizational decision-making regarding inward foreign direct investment (FDI). It argues that institutionalization is a process that works through all three pillars—cognitive, normative, and regulative—and that this process can legitimize a host market for foreign investors. The study examines institutional reform in 16 Latin American countries using several indices of institutional change occurring between 1970 and 2000. Results indicate that institutional processes that legitimize more effectively through the cognitive and normative pillars (e.g. educational attainment, bilateral investment treaties, privatization, and political uncertainty) are better indicators of inward FDI than those that legitimize primarily through the regulative pillar (e.g. tax reform, trade reform, and financial account liberalization).