Do Birds of a Feather Flock Together? Firm-level Evidence on Corruption and FDI

Abstract

This paper examines the relationship between corruption and nonmarket strategy in a multinational context, using a unique dataset with accurate, firm-specific measures of corruption. The study first examines the effects of home country corruption on firms’ foreign investment location choice. We find that a firm’s home country corruption norm is related to where it invests abroad, but this effect exists only among multinational firms from clean countries. The study then moves beyond the institutional context to explore the rationale behind the heterogeneity among firms from the same home country in compliance with a host government’s bribery request. We propose that a firm’s bribery experience interacts with their home country corruption to affect its foreign investment location choice. Only bribery experience of firms from dirty countries is found to be related to the firms’ foreign location choice. In addition, firm- specific bribery experience is not found to be related to firm performance. Our study built a unique dataset using resources from the United Nation’s (UN) Oil-for-Food Program (OFFP)’s investigation information to conduct both country and firm-level analysis. This paper contributes to the strategy and international business literature by expanding the study of corruption from country level to micro level by connecting nonmarket capability through foreign bribery experience to home country corruption, and to the limited literature using OFFP as a unique data source to study firm behaviors.