The Effect of Corruption on Foreign Direct Investment at the Regional Level: A Positive or Negative Relationship?

Abstract

This chapter looks at the effect of corruption on foreign direct investment (FDI) at the world and regional levels, with a focus on East, South and Southeast Asia. The academic literature is inconclusive because the nature of corruption can be different from one country to another and because various other factors can decide whether a foreign company will invest in a country or region despite a relatively high level of corruption. To shed light on the effect of corruption, the authors proceed to a paneleconometrics investigation that assesses the relationship between the stock of FDI and the‘control of corruption’, published by the World Bank, for a sample of 180 countries over the period 2002–2019. The‘control of corruption’ index combines 23 different assessments and surveys capturing perceptions of the extent to which public power is exercised for private gains. A low score means that the authorities do not fight corruption or are not effective in fighting it, and therefore corruption is high; and vice versa. The authors include two control variables (real GDP and secondary school enrolment) to better estimate the specific role of corruption. Their results show that at the world level, thecontrol of corruption is low and has a positive effect on FDI, which means that corruption is a stimulus to FDI, in line with Egger and Winner's findings. However, in East Asia, Southeast Asia, Australiaand New Zealand, corruption has a ‘grabbing hand’ effect. In theEuropean Union, corruption is a helping hand. The authors’ results confirm the importance of a regional approach to the analysis of the effect of corruption on FDI.