Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence

Beate K. Smarzynska and Shang-Jin Wei

No 60A, CID Working Papers from Center for International Development at Harvard University

Abstract: This paper studies the impact of corruption in a host country on foreign investor’s preference for a joint venture versus a wholly-owned subsidiary. There is a basic trade-off in using local partners. On the one hand, corruption makes local bureaucracy less transparent and increases the value of using a local partner to cut through the bureaucratic maze. On the other hand, corruption decreases the effective protection of investor’s intangible assets and lowers the probability that disputes between foreign and domestic partners will be adjudicated fairly, which reduces the value of having a local partner. The importance of protecting intangible assets increases with investor’s technological sophistication, which tilts the preference away from joint ventures in a corrupt country. Empirical tests of the hypothesis on a firm-level data set show that corruption reduces inward FDI and shifts the ownership structure towards joint ventures. Technologically more advanced firms are found to be less likely to engage in joint ventures.

Keywords: corruption; composition of foreign direct investment; multinational firms (search for similar items in EconPapers)
JEL-codes: F23 (search for similar items in EconPapers)
Date: 2001-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence (2000)
Working Paper: Corruption and the composition of foreign direct investment - firm-level evidence (2000)
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