Asymmetric influence of corruption distance on FDI

Birgit Burböck,Edith Podhovnik,Anita Macek,Christian Zirgoi

doi:10.1108/jfc-09-2017-0078

Birgit Burböck, Edith Podhovnik + Show 2 more

Open Access

https://doi.org/10.1108/jfc-09-2017-0078

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Abstract

PurposeThe purpose of this paper is to measure the influence of corruption distance (CD) on foreign direct investment (FDI) with the characteristics of the value function from the Prospect Theory (PT) such as loss aversion and diminishing sensitivity.Design/methodology/approachData are derived from Transparency International and the Organisation for Economic Co-operation and Development (OECD) and tested on the countries China, Germany, Italy, Japan, Korea, Russia, Spain and the UK and are analysed with a natural log (LN) regression model.FindingsThe findings indicate a negative asymmetric relationship for China, Germany, Korea, Spain and Russia. This means that negative performance on CD will not have greater impact on FDI outflows than positive performance on CD in the same country. Loss aversion, as well as diminishing sensitivity, as suggested by the PT, cannot be supported with the empirical results.Originality/valueIts originality lies in contributing and extending knowledge on CD on FDI in several ways. First, it analyses the data of emerging and industrialized countries, namely, Russia, China, Germany, Italy, Japan, Korea, Spain and the UK. Second, a potential asymmetric impact is explained by the characteristics of the hypothetical value function of the PT. Third, it seeks empirical evidence by applying an econometric model developed to analyse the variables CD and FDI.

Highlights

Whenever firms want to expand into international markets, foreign direct investment (FDI) is one possible option to enter the markets (Harrison, 2003)
In line with the present empirical tendency of the results, the results show that there is an asymmetric effect of corruption distance (CD) when an industrial country invests in a developing country
And in line with the prospect theory for the industrial–industrial country-pair, it shows that the negative CD has a stronger impact than the positive one, indicating that the reduction effect of the negative CD is stronger than the positive one

Summary

Introduction

Whenever firms want to expand into international markets, foreign direct investment (FDI) is one possible option to enter the markets (Harrison, 2003). FDI encourages the transfer of technology and know-how by creating direct, stable long lasting links between countries (OECD, 2014). FDI might be important especially for emerging markets. FDI can provide additional financial resources (Wong and Adams, 2002), and, compared to domestic investment, FDI can make a relatively high contribution to economic growth (Borenzstein et al, 1998). FDI can help to boost productivity and growth through the transfer of intangible assets, such as knowledge, technology, skills and management know-how (Wong and Adams 2002). Alam and Ali Shah (2013) argued that market size, labour costs and the quality of infrastructure are the most important factors attracting foreign investment

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