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The Effect of Home‐country and Host‐country Corruption on Foreign Direct Investment
Author(s) -
Brada Josef C.,
Drabek Zdenek,
Perez M. Fabricio
Publication year - 2012
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/rode.12009
Subject(s) - foreign direct investment , language change , multinational corporation , international economics , economics , monetary economics , business , macroeconomics , art , literature , finance
Abstract The effect of corruption on FDI is analysed. Using FDI outflows from a sample of East European transition economies that had virtually no outward FDI before 1995, FDI flows are observed based mainly on current investment decisions and less on the inertia of past investments. The model separates the effects of corruption on FDI location decisions and on the amount invested. A linear and negative relationship is found between host‐country corruption and the likelihood of MNCs locating in that country. The relationship between home‐country corruption and FDI is non‐monotonic, with an inverse U shape where both high and low levels of corruption in the home country reducing the probability of outward FDI flows. If FDI is undertaken to a host country, the volume of FDI is affected by home‐country but not by host‐country corruption.