Abstract
Many researchers have studied the effect of corruption on Foreign Direct Investment (FDI) and majority of them have come to the conclusion that higher levels corruption in a country deter FDI. This paper is a case-based comparative study of the effect of corruption on FDI in China and India. Corruption in India has negatively affected FDI, whereas that is not true in China. This study finds that while corruption does affect FDI inflows into a country, the effect also depends on nature of corruption and not only on size of corruption.
Highlights
Foreign Direct Investment (FDI) has become very important for developing countries as well as developed countries
In 2011 and 2012, notwithstanding a large growth in GDP, FDI has gone down by 45 percent and 42 percent respectively over 2008 levels, which can be attributed the major corruption scams Tatra truck scandal and Coalgate scam (US$ 40 billion). This observation is supported by an article in China Post, which has reported that the corruption in India has resulted in a slump of FDI by 78% in June 2011 (The China Post, 2011) [17]
The 2014 general elections in India resulted in change of the federal government with Bharatiya Janata Party winning an absolute majority for the first time in many decades. 2014 witnessed an increase of 24 percent in FDI over the previous year to US$ 35 billion indicating support to the argument corruption adversely affects FDI inflows
Summary
Foreign Direct Investment (FDI) has become very important for developing countries as well as developed countries. FDI has become a de-facto proxy for assessing the attractiveness of a country for international business. FDI is an investment by an investor from one country in a foreign country by acquiring at least 10% of a company’s capital or by creating a new business entity in the host country (UNCTAD, 2014) [1]. Corruption distorts allocation of resources, indirectly contributing to increase in prices and discourages FDI. High levels of corruption in India have adversely affected inward FDI into India, but that is not the case with China. Part 2 explains the methodology, Part 3 compares India and China, Part 4 examines the global foreign direct investment, Part 5 analyses FDI in China and India, Part 6 deals with corruption in China and India, Part 7 discusses effect of corruption on FDI in China and India, Part 8 is the discussion and findings, and Part 9 concludes the study
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