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
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: Suggested Citation