Abstract
In this study, we examine the effects of corruption in the host region on foreign ownership structure in emerging economy, Indonesia. We also analyze the effect of political power concentration in moderating the effect of corruption on foreign ownership structure. We suggest that, pervasiveness of corruption leads to high foreign equity ownership, as the benefits of local partner decrease when the corruption is highly pervasive. In contrast, arbitrariness of corruption increases the incentives for foreign investors to have local partners, because the demand for local knowledge embedded to local partner increases when the corruption is not transparent and carries a lot of ambiguity. We also propose that the effect of political concentration mitigates the both effects of pervasiveness and arbitrariness on the level of foreign equity ownership. These four hypotheses are generally supported by our analysis of 400,042 firm level observations of manufacturing establishments in 26 provinces of Indonesia between 1990 and 2012 across 32 industries (three-digit SIC).
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