Abstract
The study used panel data from 1998 to 2014 among 48 different countries to determine the relationship between foreign direct investment and corruption. For identifying the relationship, the study employed random effect model (REM), feasible general least squares method (FGLS) and panels corrected standard errors (PCSE). The results of the three panel estimation methods reveal that the variable of corruption is statistically significant at 1%, but negative relations between corruption and FDI results were determine by using REM, FGLS and PCSE estimation methods in three different regions (South and South-East Asia, Latin America, the Caribbean and Africa). It interprets that 1% decrease in the level of corruption may leads to about 8.15, 9.25 and 11.5% increase in FDI inflows by using REM, FGLS and PCSE respectively. Other control variables like gross domestic product per capital (GDPPC), gross domestic product growth rate (GDPG), population growth rate (POPG), urban population growth rate (UPOPG), trade openness, tele-density, gross school enrolment in primary (GSEP), agglomeration, bureaucracy (BURA), law and democracy are positively statistically significant as expected and risk and inflation are negatively statistically significant. Key words: Random effect model, feasible general least squares, panel corrected standard errors, FDI, corruption.
Highlights
Beginning of the 1990s, world market integration approach and transition of the economic phenomenon focusing on the market facilitation and trade liberalization agendum assists uninterrupted flow of Foreign Direct Investment (FDI) that helps radical transformation of business and its environment
The results of the three panel estimation methods reveal that the variable of corruption is statistically significant at 1%, but negative relations between corruption and FDI results were determine by using random effect model (REM), feasible general least squares method (FGLS) and panels corrected standard errors (PCSE) estimation methods in three different regions (South and South-East Asia, Latin America, the Caribbean and Africa)
The results show little effect of corruption but some estimates point out that corruption increases the probability of investing in a foreign country
Summary
Beginning of the 1990s, world market integration approach and transition of the economic phenomenon focusing on the market facilitation and trade liberalization agendum assists uninterrupted flow of Foreign Direct Investment (FDI) that helps radical transformation of business and its environment. In the international business (IB) discipline, the study of corruption only recently gained prominence as firms from developed countries engaged in operations in emerging and transition economies (Rodriguez et al, 2006). While some authors have found that high levels of corruption have a deterrent effect on FDI (Mauro, 1995; Lambsdorff, 1998; Cuervo-Cazurra, 2006; Voyer and Beamish, 2004; Woo and Heo, 2009; Wei, 2000), others have not found a relationship between these variables (Wheeler and Mody, 1992; Henisz, 2000). Developing and transition economic needs to accomplishing manifold tasks especially need to strengthening internal laws and legislation and enhance the quality of government institution that proliferate FDI especially from the different developed and industrial country. The empirical study is to focus on determining the relationship between corruption and FDI
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