Corruption distance discourages bilateral FDI … Unless you’re high: The moderating effect of direction

Abstract

This study investigates the impact of corruption, corruption distance, and corruption direction on bilateral foreign direct investment (FDI) outflows using reporting OECD Global North and Global South countries. We first posit that corruption and the absolute difference in corruption levels across a pair of countries are negatively related to a host country's level of FDI. Then we investigate the moderating effect of direction when investing in a more corrupt host country. A PPML gravity model for a panel of 5733 different North and South country pairs over the years 1998–2018 indicates both the presence of corruption and a high corruption distance between country pairs has negative effects on FDI outflows, but investing in the direction of a more corrupt host country has a positive moderating effect. Our results contribute to expand and complement the theories on corruption in FDI.