Effects of Corruption on FDI Inflow in Asian Economies

Abstract

This study offers fresh insights on and investigates the effects of corruption on foreign direct investment (FDI) inflow from 1995 to 2009 in 16 Asian economies. The empirical result suggests that a 1 percent increase in corruption level triggers an approximately 9.1 percentage point decrease in FDI inflow. Thus, some of the arguments that corruption does not keep FDI out of corrupt countries are either flawed or invalid. The results of this study suggest that some of the countries characterized by a high level of corruption but have remarkable FDI inflows could even double their inward FDIs if they manage to reduce the present pervasive level of corruption.

Keywords: corruption, FDI inflow, panel data, REM, FGLS, economic growth, openness, human capital

JEL Classification: C1, M16, O15, O17, O40, P10