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Far from Home: Do Foreign Investors Import Higher Standards of Governance in Transition Economies?

28 Pages Posted: 12 May 2003  

Joel S. Hellman

World Bank - Governance and Public Sector Reform

Geraint Jones

Massachusetts Institute of Technology (MIT) - Department of Economics

Daniel Kaufmann

Natural Resource Governance Institute (NRGI); The Brookings Institution

Date Written: August 2002

Abstract

Based on the Business Environment and Enterprise Performance Survey (BEEPS) of firms in transition countries, which unbundles corruption to measure different types of corrupt transactions and provide detailed information on the characteristics and performance of firms, we find that: i) corruption reduces FDI inflows and attracts lower quality investment in terms of governance standards; ii) in misgoverned settings, FDI firms may magnify the problems of state capture and procurement kickbacks, while paying a lower overall bribe burden than domestic firms; iii) FDI firms undertake those forms of corruption that suit their comparative advantages, generating substantial gains for them and challenging the premise that they are coerced, which makes it difficult to develop effective constraints on such behavior; and, iv) transnational legal restrictions to prevent bribery had not led to higher standards of corporate conduct among foreign investors by the year 2000. Rather than being construed as a case against foreign investment; we argue that state capture is created and maintained through restrictions on competition and entry in strategic sectors. Thus, enhancing competition by attracting a wider, more diverse set of FDI firms is critical to the broader strategic framework of fighting state capture and corruption.

Keywords: foreign direct investment, FDI, kickbacks, state capture, bribery, corporate governance, corruption, governance, transition economies

JEL Classification: D4,H0,K0,L1,L2,L5,O1,P2,P6,P5,M2,P0,H4,K2,K4

Suggested Citation

Hellman, Joel S. and Jones, Geraint and Kaufmann, Daniel, Far from Home: Do Foreign Investors Import Higher Standards of Governance in Transition Economies? (August 2002). Available at SSRN: https://ssrn.com/abstract=386900 or http://dx.doi.org/10.2139/ssrn.386900

Joel S. Hellman

World Bank - Governance and Public Sector Reform ( email )

1818 H Street
Washington, DC 20433
United States

Geraint Jones

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

Daniel Kaufmann (Contact Author)

Natural Resource Governance Institute (NRGI) ( email )

80 Broad Street
New York, NY 10004
United States

HOME PAGE: http://www.resourcegovernance.org

The Brookings Institution ( email )

1775 Massachusetts Avenue, NW
Washington, DC 20036
United States

HOME PAGE: http://www.brookings.edu/experts/kaufmannd

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