FDI, corruption and financial development around the world: A panel non-linear approach

Abstract

The nexus between corruption and FDI has long been examined, but the literature remains inconclusive. Some studies have found that corruption deters FDI while others concluded the opposite. This paper revisits the FDI–corruption nexus by investigating the mediating role of financial development for 80 advanced and emerging economies over the 2003–2019 period. Using panel smooth transition regression and GMM models, we find a non-linear relationship between corruption and FDI driven by the financial development level of the destination country. In the advanced economies, less corruption means more FDI above a corruption threshold, whereas in emerging economies, corruption level is less important as the countries are more tolerant to it. We thus contribute to the extant literature a potential reconciliation of the theories stressing that corruption can ‘sand the wheels’ and ‘grease the wheels’ of FDI. A corrupt environment can, therefore, attract FDI, but is not a prudent long-term option.