How does corruption affect FDI? A cross-sectional study on global FDI inflows and intra-OECD bilateral FDI

Abstract

PURPOSE OF THE STUDY

The purpose of this thesis is to examine the effect of corruption on global foreign direct investment (FDI) flows conducted by multinational enterprises (MNEs). The subject is approached with a review of the relevant existing research results in order to understand the underlying fundamentals of factors affecting FDI and how corruption interacts with them. Motivated by this, a cross-sectional empirical study is carried out.

METHODS AND DATA

The objective is to identify the dynamics of corruption affecting FDI with other factors of target country FDI attractiveness and to find out whether there are differences between the effects of corruption on FDI flowing into countries with different economic development levels. The analysis is conducted using OLS regression tools both for a global host country sample concentrating on how corruption affects inward FDI, and for a sample of intra-OECD bilateral FDI to examine the effects of differences in corruption levels between the source and target countries.

RESULTS

The results from the empirical part of this paper find that corruption itself is a significant deterrent of FDI inflows on a global level. However, the effect becomes less significant when the sample is divided into distinct subsamples of the OECD economies and the non-OECD countries. According to the results obtained using the gravity model of trade and FDI to analyse intra-OECD bilateral FDI, source and target country differences in corruption levels affect bilateral investments: the absolute difference correlates negatively with bilateral FDI and intra-OECD bilateral FDI in general seems to flow into target countries with lower corruption levels compared to the source country.