A Model of Corruption and Foreign Direct Investment a la John Dunning

46 Pages Posted: 22 Mar 2017

See all articles by Josef C. Brada

Josef C. Brada

Arizona State University (ASU) - Economics Department

Zdenek Drabek

World Trade Organization (WTO); Institute of Economics and Statistics; CERGE-EI

José A. Mendez

Arizona State University

Marcos Fabricio Perez

Wilfrid Laurier University - School of Business & Economics

Date Written: March 21, 2017

Abstract

We model the relationship between foreign direct investment (FDI) and the level of corruption in multinational firms’ (MCNs’) home and host countries. There are two effects of corruption. The first is that host-country corruption reduces FDI by increasing foreign firms’ costs. The second effect, based on John Dunning’s theory that an MNC’s skills reflect its home-country environment, leads MNCs to invest more in countries with corruption levels similar to those of their home country. MNCs develop skills for dealing with home-country corruption, and these skills become a competitive advantage in host countries with similar corruption levels. We test the model using bilateral FDI flows and find that both effects are economically significant.

Keywords: Corruption, Foreign Directing Investment, competitive advantage

JEL Classification: F21, F23, D21, D22, K42

Suggested Citation

Brada, Josef C. and Drabek, Zdenek and Mendez, José A. and Perez, Marcos Fabricio, A Model of Corruption and Foreign Direct Investment a la John Dunning (March 21, 2017). Available at SSRN: https://ssrn.com/abstract=2938370 or http://dx.doi.org/10.2139/ssrn.2938370

Josef C. Brada

Arizona State University (ASU) - Economics Department ( email )

Box 873806
Tempe, AZ 85287-3806
United States
602-965-6524 (Phone)
602-965-0748 (Fax)

HOME PAGE: http://www.mesharpe.com/eee_main.htm

Zdenek Drabek

World Trade Organization (WTO) ( email )

154 Rue de Lausanne
CH-1211 Geneva 21
Switzerland
+41 22 739 52 74 (Phone)
+41 22 739 57 62 (Fax)

Institute of Economics and Statistics ( email )

Opletalova 26
Prague, 11000
Czech Republic

CERGE-EI ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

José A. Mendez

Arizona State University ( email )

Tempe, AZ 85287-3806
United States
602-965-2723 (Phone)
602-965-0748 (Fax)

Marcos Fabricio Perez (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
CANADA
519-884 0710 (Phone)
519-884 0201 (Fax)

HOME PAGE: http://www.public.asu.edu/~mfperez/

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