Policeman for the World: The Impact of Extraterritorial FCPA Enforcement on Foreign Investment and Internal Controls

58 Pages Posted: 1 Apr 2019 Last revised: 8 Oct 2021

See all articles by Hans Bonde Christensen

Hans Bonde Christensen

University of Chicago - Booth School of Business

Mark G. Maffett

University of Chicago - Booth School of Business

Thomas Rauter

University of Chicago - Booth School of Business

Date Written: October 8, 2021

Abstract

We show that a mid-2000s increase in extraterritorial enforcement of the US Foreign Corrupt Practices Act (FCPA), characterized by greater international regulatory cooperation and more frequent use of the FCPA’s accounting provisions, has a significant deterrent effect on foreign direct investment in high-corruption-risk countries. The decrease in investment is at least as large for non-US as for US firms, suggesting that widespread extraterritorial enforcement helps to create a level foreign-investment playing field. Firms under US jurisdiction with fundamental characteristics that make it more difficult to maintain effective internal controls invest less in high-corruption-risk countries after the FCPA enforcement increase, suggesting regulatory compliance costs play a role in deterring investment. Consistent with investments in accounting systems being one way firms limit enforcement risk when investing in high-corruption-risk countries, firms pursuing new investments spend more time evaluating potential targets and firms with existing investments report fewer restatements related to unintentional errors.

Keywords: Foreign Corruption Regulation; Extraterritorial Enforcement; Foreign Corrupt Practices Act (FCPA); Foreign Investment; Internal Controls

JEL Classification: F50; F60; K2; M4; O1

Suggested Citation

Christensen, Hans Bonde and Maffett, Mark G. and Rauter, Thomas, Policeman for the World: The Impact of Extraterritorial FCPA Enforcement on Foreign Investment and Internal Controls (October 8, 2021). Available at SSRN: https://ssrn.com/abstract=3349272 or http://dx.doi.org/10.2139/ssrn.3349272

Hans Bonde Christensen

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Mark G. Maffett (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Thomas Rauter

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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