Foreign Direct Investment: Rule of Law and Corruption

Abstract

AbstractI present a simple model of two representative firms embedded in an environment of institutionalized government corruption. One firm has access to foreign direct investment, but that access is limited by the quality of rule of law in the economy. I use the model to explore the question, addressed in recent economic literature, of whether or not foreign direct investment reduces corruption. I show that corruption may increase or decrease depending on the interaction of foreign direct investment and rule of law. Further, I show that, under certain circumstances, the corrupt governmental bureaucracy may increase corrupt revenue by increasing the quality of legal protection.