Abstract
A new area of research has recently emerged that analyzes the impact of corruption on foreign direct investment (FDI) in developing countries. The FDI literature comprises two opposing views of corruption—the grabbing hand hypothesis holds that corruption impedes FDI by raising uncertainty and transaction costs and the helping hand hypothesis holds that corruption facilitates FDI by greasing the wheels of commerce in the presence of weak regulatory frameworks. This study analyzes the impact of corruption on FDI inflows in 53 countries in Africa over the 1995–2012 period. Using the dynamic System Generalized Method of Moments modeling framework (Arellano-Bover/Blundell-Bond linear dynamic panel), this study finds support for the helping hand hypothesis, i.e., corruption facilitates FDI inflows in Africa. It is likely that the overall regulatory environment in Africa is weak, which helps explain the context in which the helping hand hypothesis can be validated. In addition, this study finds that past levels of FDI, market size, government effectiveness, infrastructure, and economic freedom also affect FDI significantly. These results further our knowledge of the FDI dynamics in Africa, which policymakers should find helpful in devising pro-FDI strategies.
Highlights
Foreign direct investment (FDI) plays an important role in the growth dynamics of developing countries
The average corruption perception index is negatively related with FDI inflows, which suggests that lower Corruption Perceptions Index (CPI) scores attract more FDI in Africa, which lends credence to the “helping hand” hypothesis
This study uses the dynamic panel regression modeling methodology on 1995–2012 data from 53 African countries to investigate the role of corruption on FDI
Summary
Foreign direct investment (FDI) plays an important role in the growth dynamics of developing countries. —all of which should contribute to economic growth in host countries. Recognizing these benefits, developing countries have generally eased restrictions on FDI since the early 1980s. The declining trend over 2008–2011 was caused by several factors, including the onset of a global financial crisis, drop in commodity prices, and political unrest in North Africa (region that accounts for 1/3rd of total FDI inflows to the continent). Given that foreign investment accounts for about 20% of Africa’s gross fixed capital formation, this decline is worrisome. Despite this temporary setback, foreign investors will likely continue to invest in Africa, due to relatively high profitability.
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