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
Date Written: August 20, 2017
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: Suggested Citation