Abstract
Prior research has identified a negative impact of corruption on countries’ ability to attract Foreign Direct Investment (FDI) but has been scant in assessing the investors’ home country effects. We extend prior research by distinguishing the pervasiveness and arbitrariness of host country corruption and their effects on FDI inflows. We also test whether the investors’ home country corruption affects FDI decisions. Results show that host country pervasive corruption negatively drives FDI inflows but not the arbitrariness component. While the investors’ home country corruption negatively impacts the overall FDI outflows, investors from countries with high levels of corruption do not seem to be deterred by a high level of pervasive corruption in the host country. These results suggest that there may exist some form of corruption-dealing capability whereby firms from countries with high corruption are less sensitive to host country corruption and in fact they are able to leverage their capability and invest more in corrupt hosts.
Highlights
Prior research has identified a negative impact of corruption on countries’ ability to attract Foreign Direct Investment (FDI) but has been scant in assessing the investors’ home country effects
We found that the host country pervasive corruption negatively impacts the foreign direct investment (FDI) inflows, but we failed to find a significant effect of arbitrary corruption
To test whether a problem of multicollinearity exists in our estimation, we followed the approach recommended by Neter, Kutner, Nachtsheim and Wasserman (1996) and computed variance inflation factors (VIFs) are computed when all variables were included in each model
Summary
Prior research has identified a negative impact of corruption on countries’ ability to attract Foreign Direct Investment (FDI) but has been scant in assessing the investors’ home country effects. While the investors’ home country corruption negatively impacts the overall FDI outflows, investors from countries with high levels of corruption do not seem to be deterred by a high level of pervasive corruption in the host country. We propose, complementing extant literature on how corruption impacts FDI flows, to consider both host and home country effects, examining the moderating role of home country corruption on the relationship between the host country corruption and FDI received. The investors’ home country corruption is shown to be a significant predictor of FDI flows, an aspect that has been largely often overlooked in prior research
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