Fortune or Evil? The Effect of Inward Foreign Direct Investment on Corruption
International Studies Quarterly, Vol. 60, No. 4, pp. 693-705, 2016
68 Pages Posted: 8 Jan 2009 Last revised: 22 Feb 2017
Date Written: June 23, 2009
Abstract
We analyze how one of the central drivers of globalization, foreign direct investment (FDI), relates to the prevalence of corruption. According to received wisdom, the link between globalization and corruption depends on the presence of proper political institutions and practices. We develop an alternative explanation that looks at the effect of inward FDI on host market dynamics, which in turn affect the opportunities for rent creation. We argue that, in less developed countries, FDI inflows can increase market concentration, resulting in higher rents that public officials can demand from market actors. Yet, the positive association between inward investment and corruption is mitigated in more developed economies. There, foreign entry into a market populated by productive indigenous firms promotes competition and reduces rents. This lowers opportunities for corrupt behavior. We test this nonlinear relationship between FDI and corruption in an instrumental variable two-stage least squares setting. The results indicate that FDI is indeed associated with higher levels of corruption in less developed countries, but not in developed countries. Our findings highlight the role of globalization in shaping host countries’ market dynamics, which often set the parameters of political outcomes.
Keywords: foreign direct investment, corruption, instrumental variables
JEL Classification: D72, D73, F21, F23, C12
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
The Politics of Investment: Partisanship and the Sectoral Allocation of Foreign Direct Investment
By Pablo M. Pinto and Santiago M. Pinto
-
Skills Substitutability and Technological Progress: U.S. States 1950-1990
By Antonio Ciccone and Giovanni Peri
-
Foreign Direct Investment in a Developing Country with Economic Reform