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Opportunism, Corruption and the Multinational Firm’s Mode of Entry

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Abstract

The paper models the boundaries of the multinational firm by looking at a simple trade-off between FDI (internal expansion with strong control rights) and debt (arm’s length expansion with loose control rights) in the context of contractual incompleteness due to institutional constraints in host countries, i.e. problems of commitment and, especially, corruption. It develops a theoretical approach to the two main types of corruption: petty bureaucratic corruption and high-level political corruption. The model predicts that multinational firms prefer FDI the weaker the ability to commit of the host country, while both types of corruption shift the trade-off marginally toward debt. Cross-country panel empirical evidence supports these conclusions.

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File URL: http://www.econ.ed.ac.uk/papers/foreign_investment_corruption.pdf
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Bibliographic Info

Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 102.

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Length: 45
Date of creation: Mar 2004
Date of revision:
Handle: RePEc:edn:esedps:102

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Keywords: FDI; Debt; Multinational firms; Capital flows; Expropriation; Corruption.;

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References

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  1. Aart Kraay & Norman Loayza & Luis Servén, 2001. "Country portfolios," Working Papers Central Bank of Chile 91, Central Bank of Chile.
  2. Kaufmann, Daniel, 2004. "Corruption, Governance and Security: Challenges for the Rich Countries and the World," MPRA Paper 8207, University Library of Munich, Germany.
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  9. Eckhard Janeba, 2002. "Attracting Fdi in a Politically Risky World," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1127-1155, November.
  10. Sarno, Lucio & Taylor, Mark P., 1999. "Hot money, accounting labels and the permanence of capital flows to developing countries: an empirical investigation," Journal of Development Economics, Elsevier, vol. 59(2), pages 337-364, August.
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  17. Beata K. Smarzynska & Shang-Jin Wei, 2000. "Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence," NBER Working Papers 7969, National Bureau of Economic Research, Inc.
  18. Henisz, Witold J, 2000. "The Institutional Environment for Multinational Investment," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(2), pages 334-64, October.
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Citations

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Cited by:
  1. Sanjo, Yasuo, 2012. "Country risk, country size, and tax competition for foreign direct investment," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 292-301.
  2. Graf Lambsdorff, Johann, 2005. "Consequences and causes of corruption: What do we know from a cross-section of countries?," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-34-05, University of Passau, Faculty of Business and Economics.
  3. Guasch, J. Luis & Laffont, Jean-Jacques & Straub, Stephane, 2005. "Infrastructure concessions in Latin America : government-led renegotiations," Policy Research Working Paper Series 3749, The World Bank.

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