Abstract:

In the last two decades, the level of corruption in the host country has been introduced as one factor among the determinants of FDI location. From a theoretical viewpoint, corruption—that is, paying bribes to corrupt government bureaucrats to get “favors” such as permits, investment licenses, tax assessments, and police protection—is generally viewed as an additional cost of doing business or a tax on profits. As a result, corruption can be expected to decrease the expected profitability of investment projects. Investors will therefore take the level of corruption in a host country into account in making decisions to invest abroad.

The empirical literature on the effects of the host country’s corruption level on FDI inflows, however, has not found the commonly expected effects. Some empirical studies provide evidence of a negative link between corruption and FDI inflows, while others fail to find any significant relationship.

The main objective of this paper is determining the relationship between FDI inflows and a country’s level of corruption using the FDI inflows of the 20 least-corrupt and the 20 most-corrupt countries.