Better the Devil You Don't Know: Type of Corruption and FDI in Transition Economies

Journal of International Management, 2008

23 Pages Posted: 6 Dec 2007

See all articles by Alvaro Cuervo-Cazurra

Alvaro Cuervo-Cazurra

Northeastern University - Department of International Business and Strategy

Abstract

Corruption has a negative impact on foreign direct investment (FDI). However, transition economies show high levels of corruption and also high levels of FDI. I argue that it is not the level but rather the type of corruption that affects FDI in transition economies. Pervasive corruption, or corruption that is widely present, acts as a deterrent to FDI because it increases the known costs of investing, while arbitrary corruption, or corruption that is uncertain, does not have such a deterring influence because it becomes part of the uncertainty of operating in transition economies. In transition economies, investors prefer to deal with an unknown evil - the arbitrariness of corruption - rather than a known one - the pervasiveness of corruption.

Keywords: corruption, foreign direct investment, institutions, transition economies

JEL Classification: F21, F23, K42, P39

Suggested Citation

Cuervo-Cazurra, Alvaro, Better the Devil You Don't Know: Type of Corruption and FDI in Transition Economies. Journal of International Management, 2008. Available at SSRN: https://ssrn.com/abstract=1059221

Alvaro Cuervo-Cazurra (Contact Author)

Northeastern University - Department of International Business and Strategy ( email )

D'Amore-McKim School of Business
313 Hayden Hall, 360 Huntington Avenue
Boston, MA 02115
United States
16173736568 (Phone)
16173738628 (Fax)

HOME PAGE: http://cuervo-cazurra.com

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