The Effectiveness of Laws against Bribery Abroad

Abstract:     
I analyze the effectiveness of laws against bribery abroad in inducing foreign investors to reduce their investment in corrupt countries. The laws are designed to reduce the supply of bribes by foreign investors by increasing the costs of bribing abroad. Such increase in costs will make foreign investors more sensitive to corruption and induce them to reduce their investments in corrupt countries. However, I argue that these laws need to be implemented and coordinated in multiple countries to become effective. Otherwise, investors in a country will have incentives to bypass them when competitors from other countries are not bound by similar legal constrains. The empirical analysis shows that investors from countries that implemented the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transaction of 1997 reduced their investments in corrupt countries. Investors from the US, which were bound by the Foreign Corrupt Practices Act of 1977, also reduced investments in corrupt countries, but only after the OECD Anti-Bribery Convention was in place.

Keywords: corruption, foreign direct investment, law, institutions

JEL Classifications: F21, F23, K42

Accepted Paper Series