Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence
24 Pages Posted: 26 Apr 2000
There are 2 versions of this paper
Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence
Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence
Date Written: April 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. A simple model highlights 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. Conditional on FDI taking place, an increase in corruption from the Hungarian level to that of Azerbaijan decreases the probability of a wholly-owned subsidiary by 10-20%. Technologically more advanced firms are found to be less likely to engage in joint ventures. On the other hand, US firms are found to be more averse to joint ventures in corrupt countries than investors of other nationalities. This may be due to the U.S. Foreign Corrupt Practices Act.
JEL Classification: O17
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Daniel Kaufmann, Aart Kraay, ...
-
Aggregating Governance Indicators
By Daniel Kaufmann, Aart Kraay, ...
-
Governance Matters IV: Governance Indicators for 1996-2004
By Daniel Kaufmann, Aart Kraay, ...
-
Governance Matters Ii: Updated Indicators for 2000-01
By Daniel Kaufmann, Aart Kraay, ...
-
Governance Matters VI: Governance Indicators for 1996-2006
By Daniel Kaufmann, Aart Kraay, ...
-
Governance Matters V: Aggregate and Individual Governance Indicators for 1996-2005
By Daniel Kaufmann, Aart Kraay, ...
-
Corruption, Public Investment, and Growth
By Vito Tanzi and Hamid R. Davoodi
-
Corruption, Growth, and Public Finances
By Vito Tanzi and Hamid R. Davoodi
-
Corruption, Growth, and Public Finances
By Vito Tanzi and Hamid R. Davoodi