The Effect of Corruption on FDI and Its Modes of Entry

Journal of Financial Economic Policy, Forthcoming

28 Pages Posted: 29 Sep 2017 Last revised: 25 Aug 2018

See all articles by Hiep Luu

Hiep Luu

University of St. Andrews

Ngoc Nguyen

Centre for Applied Economics and Business Research

Hai Ho

Foreign Trade University (FTU)

Nam Vu

Foreign Trade University (FTU)

Date Written: August 20, 2017

Abstract

Purpose – The purpose of this paper is to empirically investigate the impact of corruption on foreign direct investment (FDI) and its two major modes of entry: greenfield investment (greenfield) and cross-border mergers and acquisitions (M&As).

Design/methodology/approach – Data is collected from 131 countries. Modern econometric techniques, including the generalized method of moments (GMM) estimator, two-stage least square estimator, and two-step system GMM estimator, are utilized to evaluate the impact of corruption on FDI activities.

Findings – The empirical results illustrate that corruption is a deterioration factor that significantly hinders FDI inflows. However, this finding turns out to be contradictory when the two major components of FDI – greenfield investment and cross-border M&As, are separately examined. Specifically, while corruption consistently discourages cross-border M&As over time, it appears to exert positive effect on greenfield investments.

Originality/value – This is among the first to empirically examine the impact of corruption on FDI and its modes of entry in a number of countries spanning different time windows. In this sense, this study also captures the changing nature of societies and economic conditions overtime, and therefore, enable academic researchers, policy-makers, and business practitioners to draw broad inferences from the empirical results.

Keywords: Keywords FDI, greenfield investment, cross-border M&As, corruption

JEL Classification: O53, F14, H11, D73

Suggested Citation

Luu, Hiep and Nguyen, Ngoc and Ho, Hai and Vu, Nam, The Effect of Corruption on FDI and Its Modes of Entry (August 20, 2017). Journal of Financial Economic Policy, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3043758 or http://dx.doi.org/10.2139/ssrn.3043758

Hiep Luu (Contact Author)

University of St. Andrews ( email )

The Gateway, North Haugh, St Andrews
St Andrews, Fife KY16 9SS
Great Britain

Ngoc Nguyen

Centre for Applied Economics and Business Research ( email )

Hanoi
Vietnam

Hai Ho

Foreign Trade University (FTU) ( email )

91 Chua Lang St
Dong Da District
Hanoi, Hochiminh city 10000
Vietnam

Nam Vu

Foreign Trade University (FTU) ( email )

91 Chua Lang St
Dong Da District
Hanoi, Hochiminh city 10000
Vietnam

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