Policeman for the World: U.S. Enforcement of Foreign Corruption Regulation and Corporate Investment Policies

Abstract

We examine the impact of US enforcement of the Foreign Corrupt Practices Act (FCPA) on firms’ investment policies. Following a sharp increase in FCPA prosecutions in the mid-2000s, particularly for violations of the Act’s recordkeeping provision, both US and non-US companies under US jurisdiction headquartered in countries that agree to increase cooperation with US regulators (“FCPA” firms) reduce direct investment in corrupt countries; there is no evidence that non-FCPA firms offset this reduction. Consistent with the FCPA imposing significant recordkeeping-related compliance costs, following the enforcement increase, FCPA firms significantly strengthen their internal anti-bribery controls when investing in a corrupt country.

Keywords: Foreign Corruption Regulation; Enforcement; Foreign Corrupt Practices Act (FCPA); Foreign Direct Investment; Mergers and Acquisitions; Internal Controls

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