Foreign Investment and Bribery: A Firm-Level Analysis of Corruption in Vietnam

Abstract

Among the concerns faced by countries pondering the costs and benefits of greater economic openness to international capital flows is the worry that new and powerful external actors will exert a corrupting influence on the domestic economy. In this paper, we use a novel empirical strategy, drawn from research in experimental psychology, to test the linkage between foreign direct investment (FDI) and corruption. The prevailing literature has produced confused and contradictory results on this vital relationship due to errors in their measurement of corruption which are correlated with FDI inflows. When a less biased operationalization is employed, we find clear evidence of corruption during both registration and procurement procedures in Vietnam. The prevalence of corruption, however, is not associated with inflows of FDI. On the contrary, one measure of economic openness appears to be the most important driver of reductions in Vietnamese corruption: the wave of domestic legislation, which accompanied the country's bilateral trade liberalization agreement with the United States (US-BTA), significantly reduced bribery during business registration

Keywords: Vietnam, FDI, Corruption, Unmatched count technique, Bribery, List question

JEL Classification: P33, F23, D22, D72, D73, O12