How Corruption Distance Affects FDI Inflows in India?

Abstract

As firms invest in foreign countries, they face additional costs of doing business in the form of liabilities of foreignness. The liabilities of foreignness are aggravated by the distance in the institutional environment of the home country in which the firms are embedded and the host country in which they invest. Within this context, the aim of this research paper is to examine if a specific form of institutional distance, that is, corruption distance, affects the quantum of inward foreign direct investment (FDI) in India, which is a large emerging market and an important receiver of global FDI flows. Using country-wise FDI inflows data from 2008 to 2020, the results of panel autoregressive distributed lag (ARDL) method reveal the presence of a long-run relationship between FDI inflows and corruption distance between India and the home country of the investor firm. The disequilibrium in the long-run relationship, if any, gets adjusted at the rate of 38.1% per year. The findings also suggest that an improvement in the control of corruption is expected to lead to greater FDI inflows in the country, thereby providing an important policy implication. To attract FDI and to fully realise its benefits which are essential for an emerging country like India, policymakers need to make concerted efforts to control the level of corruption.