Abstract
This paper uses cointegrated error-correction modeling to investigate the nature of Granger causality between corruption and foreign direct investment (FDI) in two rapidly emerging economic superpowers; namely, China and India. The results for China and India indicate that short-run Granger causality unidirectionally runs from FDI to corruption without feedback. These empirical findings (along with supporting theoretical arguments) dispute prior correlational-based studies which claim that corruption instigates changes in FDI. However, our results further support significant long-run causality running from corruption to FDI inflows, but only in India (not in China). This finding reinforces theoretical propositions of lower corruption arbitrariness in China as compared to India. Furthermore, short- and long-run causality between corruption and FDI in India appear dynamic in nature and time-sensitive implying some difficulties for policymakers in their fight against corruption. The paper discusses possible underlying reasons for the empirical results and draws several policy and Asian business implications.
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