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Corruption and Cross-Border Investment in Emerging Markets: Firm-Level Evidence

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  • Beata S. Javorcik

    (University of Oxford)

  • Shang-Jin Wei

    (Columbia University)

Abstract

This paper studies the impact of corruption in emerging markets on the mode of entry and volume of 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.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 062009.

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Length: 34 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:hkm:wpaper:062009

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Keywords: Corruption; Developing Countries; Multinational Firms;

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  1. Grubaugh, Stephen G, 1987. "Determinants of Direct Foreign Investment," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 149-52, February.
  2. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," NBER Working Papers 6030, National Bureau of Economic Research, Inc.
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  4. Portes, Richard & Rey, Helene, 2005. "The determinants of cross-border equity flows," Journal of International Economics, Elsevier, Elsevier, vol. 65(2), pages 269-296, March.
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  7. Shang-Jin Wei, 2000. "Local Corruption and Global Capital Flows," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 303-354.
  8. Daniel Kaufmann & Shang-Jin Wei, 2000. "Does 'Grease Money' Speed Up the Wheels of Commerce?," IMF Working Papers 00/64, International Monetary Fund.
  9. Daude, Christian & Fratzscher, Marcel, 2008. "The pecking order of cross-border investment," Journal of International Economics, Elsevier, Elsevier, vol. 74(1), pages 94-119, January.
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  14. James R. Hines, Jr., 1995. "Forbidden Payment: Foreign Bribery and American Business After 1977," NBER Working Papers 5266, National Bureau of Economic Research, Inc.
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  16. Ades, Alberto & Di Tella, Rafael, 1997. "National Champions and Corruption: Some Unpleasant Interventionist Arithmetic," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 107(443), pages 1023-42, July.
  17. Smarzynska, Beata K., 2002. "The composition of foreign direct investment and protection of intellectual property rights : evidence from transition economies," Policy Research Working Paper Series 2786, The World Bank.
  18. Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Aggregating governance indicators," Policy Research Working Paper Series 2195, The World Bank.
  19. Bruce Kogut & Harbir Singh, 1988. "The Effect of National Culture on the Choice of Entry Mode," Journal of International Business Studies, Palgrave Macmillan, vol. 19(3), pages 411-432, September.
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  21. Elizabeth Asiedu & Hadi Salehi Esfahani, 2001. "Ownership Structure In Foreign Direct Investment Projects," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 647-662, November.
  22. Shang-Jin Wei, 1997. "Why is Corruption So Much More Taxing Than Tax? Arbitrariness Kills," NBER Working Papers 6255, National Bureau of Economic Research, Inc.
  23. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(3), pages 681-712, August.
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