Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence

26 Pages Posted: 13 Oct 2000 Last revised: 12 Oct 2022

See all articles by Beata Smarzynska Javorcik

Beata Smarzynska Javorcik

University of Oxford - Department of Economics; World Bank - Development Research Group (DECRG); Centre for Economic Policy Research (CEPR)

Shang-Jin Wei

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2000

Abstract

This paper studies the impact of corruption in a host country on foreign investor's preference for a joint venture versus a wholly-owned subsidiary. There is a basic trade-off in using local partners. On the one hand, corruption makes local bureaucracy less transparent and increases the value of using a local partner to cut through the bureaucratic maze. On the other hand, corruption decreases the effective protection of investor's intangible assets and lowers the probability that disputes between foreign and domestic partners will be adjudicated fairly, which reduces the value of having a local partner. The importance of protecting intangible assets increases with investor's technological sophistication, which tilts the preference away from joint ventures in a corrupt country. Empirical tests of the hypothesis on a firm-level data set show that corruption reduces inward FDI and shifts the ownership structure towards joint ventures. Technologically more advanced firms are found to be less likely to engage in joint ventures.

Suggested Citation

Javorcik, Beata Smarzynska and Wei, Shang-Jin, Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence (October 2000). NBER Working Paper No. w7969, Available at SSRN: https://ssrn.com/abstract=245851

Beata Smarzynska Javorcik (Contact Author)

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Centre for Economic Policy Research (CEPR)

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Shang-Jin Wei

Columbia University - Columbia Business School, Finance ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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