Is corruption endogenous to foreign direct investment in resource-rich developing economies?

Abstract

This paper offers econometric evidence that corruption and foreign direct investment (FDI) can co-evolve if conditional on the level of development, the type of regimes, and the level of natural resource endowment. In conventional FDI empirical studies, the perceived corruption level in host countries is treated as being exogenous. Corruption, however, is also found to be endogenous to FDI depending upon economic circumstances and political conditions prevailing in host countries. The impact of FDI on corruption in host economies is found to vary across economies if disaggregated samples are used. Asian economies show a different pattern as compared to other regions. African economies display two distinct trends in their association with FDI activities if conditional on resource availability. The minimum threshold level of income beyond which increased inflow of FDI will result in lower corruption increases with the increased availability of resources. The impact is much greater for resource-rich developing economies managed by authoritarian regimes. To account for the joint-determination of corruption and FDI in resource-rich developing economies, this paper proposes a system of simultaneous equations to consistently estimate the parameters of the structural equations for three disaggregated samples. Results obtained from 2sls estimations confirm that there is a simultaneity issue as the coefficients for corruption variable as well as FDI are highly significant. The coefficients of other major determinants of corruption and FDI are also robust and strong. The consumption of FDI in resource-rich African economies results in higher corruption than it is in resource-rich Middle Eastern economies.