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The effect of corruption on foreign direct investment in natural resources: A Latin American case study

Author

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  • Manuel David Cruz
  • Ashish Kumar Sedai

Abstract

This study looks at the relationship between corruption and foreign direct investment (FDI) in natural resources using a panel of 20 Latin American countries from 1995-2019. We find that lower levels of corruption have a positive and significant impact on resource FDI supporting the grabbing hand hypothesis. A one-point increase in the Corruption Perception Index (CPI) is associated with an increase between 52-57 million dollars across models with varying controls. Results also show a nonlinear relationship between CPI and resource FDI, suggesting that when a country becomes less corrupt and improves its economic, social and political performance, it usually attracts more resource FDI. The analysis is robust to alternate measures of corruption (CPI, ICRG, and WGI) and different specifications of the dynamic panel model. Finally, the study highlights significant precautions and pre-conditions required to increase economic development when attracting natural resource-based FDI.

Suggested Citation

  • Manuel David Cruz & Ashish Kumar Sedai, 2021. "The effect of corruption on foreign direct investment in natural resources: A Latin American case study," CAMA Working Papers 2021-98, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2021-98
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2021-12/98_2021_cruz_sedai.pdf
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    More about this item

    Keywords

    Foreign direct investment; corruption; natural resources; grabbing hand; Latin America;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy

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