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Does Foreign Direct Investment Decrease Corruption?

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Author Info
Felipe Larraín () (Instituto de Economía. Pontificia Universidad Católica de Chile.)
José Tavares

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Abstract

This paper assesses the effect of openness on corruption, using foreign direct investment (FDI) inflows as a measure of openness, after trade intensity is accounted for. We use a broad cross section of countries over the period 1970 to 1994 and address the issue of causality with a new set of instrumental variables relying on geographical and cultural distance between the FDI exporting and recipient countries. The economics literature has demonstrated that higher corruption levels discourage FDI. Here we study the reverse link, that is, how foreign direct investment impacts corruption. We find that FDI as a share of GDP is significantly associated with lower corruption levels, irrespective of import intensity levels. The quantitative impact of FDI on corruption appears to be of the same order of magnitude as that of per capita GDP.

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Publisher Info
Article provided by Instituto de Economía. Pontificia Universidad Católica de Chile. in its journal Cuadernos de Economía.

Volume (Year): 41 (2004)
Issue (Month): 123 ()
Pages: 217-230
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Handle: RePEc:ioe:cuadec:v:41:y:2004:i:123:p:217-230

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Related research
Keywords: Foreign Direct Investment; Corruption; International Trade; Istrumental Variables;

Find related papers by JEL classification:
F10 - International Economics - - Trade - - - General
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
F30 - International Economics - - International Finance - - - General
H10 - Public Economics - - Structure and Scope of Government - - - General

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  12. Carlos Leite & Jens Weidmann, 1999. "Does Mother Nature Corrupt - Natural Resources, Corruption, and Economic Growth," IMF Working Papers 99/85, International Monetary Fund.
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    Other versions:
  17. Bliss, Christopher & Di Tella, Rafael, 1997. "Does Competition Kill Corruption?," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1001-23, October.
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