Corruption and Cross-Border Investment: Firm-Level Evidence

Beata K. Smarzynska () and Shang-Jin Wei
Authors registered in the RePEc Author Service: Beata Smarzynska Javorcik

No 494, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: This paper studies the impact of corruption on inward foreign direct investment using a unique firm-level data set. It examines two effects of corruption simultaneously: a reduction in the volume of foreign investment and a shift in the ownership structure. Corruption makes local bureaucracy less transparent and hence acts as a tax on foreign investors. Moreover, corruption affects the decision to take on a local partner. On the one hand, corruption 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 evidence shows 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; Foreign direct investment; Multinational firms (search for similar items in EconPapers)
JEL-codes: F23 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2002-08-15
New Economics Papers: this item is included in nep-com and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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