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Foreign Direct Investment: Rule of Law and Corruption
Author(s) -
Pierre Norbert
Publication year - 2015
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/ajfs.12089
Subject(s) - foreign direct investment , language change , rule of law , bureaucracy , revenue , government (linguistics) , quality (philosophy) , investment (military) , business , economics , market economy , law and economics , international economics , law , macroeconomics , political science , finance , art , linguistics , philosophy , literature , epistemology , politics
I present a simple model of two representative firms embedded in an environment of institutionalized government corruption. One firm has access to foreign direct investment, but that access is limited by the quality of rule of law in the economy. I use the model to explore the question, addressed in recent economic literature, of whether or not foreign direct investment reduces corruption. I show that corruption may increase or decrease depending on the interaction of foreign direct investment and rule of law. Further, I show that, under certain circumstances, the corrupt governmental bureaucracy may increase corrupt revenue by increasing the quality of legal protection.