Far From Home: Do Foreign Investors Import Higher Standards of Governance in Transition Economies?

Joel S. Hellman, Geraint Jones and Daniel Kaufmann ()
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Joel S. Hellman: The World Bank
Geraint Jones: MIT

Development and Comp Systems from EconWPA

Abstract: Based on the Business Environment and Enterprise Performance Survey (BEEPS) of firms in transition countries, which unbundles corruption to measure different types of corrupt transactions and provide detailed information on the characteristics and performance of firms, we find that: i) corruption reduces FDI inflows and attracts lower quality investment in terms of governance standards; ii) in misgoverned settings, FDI firms may magnify the problems of state capture and procurement kickbacks, while paying a lower overall bribe burden than domestic firms; iii) FDI firms undertake those forms of corruption that suit their comparative advantages, generating substantial gains for them and challenging the premise that they are coerced, which makes it difficult to develop effective constraints on such behavior; and, iv) transnational legal restrictions to prevent bribery had not led to higher standards of corporate conduct among foreign investors by the year 2000. Rather than being construed as a case against foreign investment; we argue that state capture is created and maintained through restrictions on competition and entry in strategic sectors. Thus, enhancing competition by attracting a wider, more diverse set of FDI firms is critical to the broader strategic framework of fighting state capture and corruption.

Keywords: foreign direct investment; FDI; kickbacks; state capture; bribery; corporate governance; corruption; governance; transition economies (search for similar items in EconPapers)
JEL-codes: D4 H0 K0 L1 L2 L5 O1 P2 P5 M2 P0 H4 K2 K4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-ifn, nep-law, nep-pbe, nep-pol and nep-tra
Date: 2003-08-27
Note: Type of Document - Acrobat PDF; pages: 28
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