The Incidence of Crime on Industry‐Level Foreign Direct Investment: An Assessment of OECD Member Countries*

Abstract

In this article, we assess whether the incidence of crime helps to explain the variation in sectoral FDI flows. Using a panel of 29 Organization of Economic Co-operation and Development (OECD) countries for the period 2003-2012, we employ a generalized method of moments (GMM) estimation strategy due to the potential for endogeneity between our variables of interest. Our results indicate that crime deters investment to the service sector. In particular, this effect is observed in the following service industry subsector: financial services. Policymakers interested in boosting FDI in the affected sectors should be concerned with policies that focus on the reduction of criminal activities.

Organized Crime and Foreign Direct Investment: Evidence From Criminal Groups in Mexico

“…One could expect different sensitivity or elasticity to criminal violence depending on the kind or origin of FDI (Blanco, Ruiz, and Wooster 2019;Brown and Hibbert 2019;Witte et al 2016). 22 Unfortunately, as mentioned above, new FDI data is not disaggregated in any of these dimensions.…”

“…Beyond political violence, the literature has examined how crime and criminal violence might affect FDI. Some global studies find a negative relationship between the homicide rate and total FDI (Brown and Hibbert 2017), or FDI in some sectors, but not others (Blanco, Ruiz, and Wooster 2019; Brown and Hibbert 2019). Country studies of crime and FDI sometimes find similar results.…”

“…Some studies examine how political violence may deter FDI (Powers and Choi 2012), and scholars have begun to explore relationships between criminal violence and investment. However, most of this work examines crime generally, not organized crime (Blanco, Ruiz, and Wooster 2019; Brock 1998; Brown and Hibbert 2019; Cabral, Mollick, and Saucedo 2019). Other studies stress the importance of organized crime, but almost all use proxies such as the homicide rate because more precise measures have not been available (Ashby and Ramos 2013; Ramos and Ashby 2013).…”

Kidnapping rate and capital flight: Empirical evidence from developing countries

“…The prevalence of crime also increases the cost of doing business and can lead to market inefficiencies, economic distortions, business failures, and as a result, viable businesses and economic activities may relocate to safer countries (Brown & Hibbert, 2017; Yepes, Pedroni, & Hu, 2015). All these are likely to increase the rate of capital flight from a country by disincentivizing investors (Brown & Hibbert, 2019). There is also the psychological effect associated with crime that can influence the investment decision making of owners of wealth thereby reducing their willingness to adding to their stock of capital investment and thus resulting in an increase in capital flight (Robles et al, 2013).…”

Does Crime Affect Firm Performance: Evidence From Post-Transition Economies

“…9 The crime-affected regions are also the regions with increased poverty, thus further increase in crime activity additionally decreases local demand. 10 This effect of crime could be particularly severe for specific economic activities if customers fear that they will be victimized when making specific purchases. Islam 11 finds the important relationship between a crime against firms and economic growth that is particularly detrimental for small and medium-sized firms.…”