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Far From Home: Do Foreign Investors Import Higher Standards of Governance in Transition Economies?

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Author Info

  • Joel S. Hellman

    (The World Bank)

  • Geraint Jones

    (MIT)

  • Daniel Kaufmann

    (The World Bank Institute)

Abstract

Based on the Business Environment and Enterprise Performance Survey (BEEPS) of firms in transition countries, which unbundles corruption to measure different types of corrupt transactions and provide detailed information on the characteristics and performance of firms, we find that: i) corruption reduces FDI inflows and attracts lower quality investment in terms of governance standards; ii) in misgoverned settings, FDI firms may magnify the problems of state capture and procurement kickbacks, while paying a lower overall bribe burden than domestic firms; iii) FDI firms undertake those forms of corruption that suit their comparative advantages, generating substantial gains for them and challenging the premise that they are coerced, which makes it difficult to develop effective constraints on such behavior; and, iv) transnational legal restrictions to prevent bribery had not led to higher standards of corporate conduct among foreign investors by the year 2000. Rather than being construed as a case against foreign investment; we argue that state capture is created and maintained through restrictions on competition and entry in strategic sectors. Thus, enhancing competition by attracting a wider, more diverse set of FDI firms is critical to the broader strategic framework of fighting state capture and corruption.

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File URL: http://128.118.178.162/eps/dev/papers/0308/0308006.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Development and Comp Systems with number 0308006.

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Length: 28 pages
Date of creation: 27 Aug 2003
Date of revision:
Handle: RePEc:wpa:wuwpdc:0308006

Note: Type of Document - Acrobat PDF; pages: 28
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Web page: http://128.118.178.162

Related research

Keywords: foreign direct investment; FDI; kickbacks; state capture; bribery; corporate governance; corruption; governance; transition economies;

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References

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  1. Drabek, Z. & Payne, W., 1999. "The Impact of Transparency on Foreign Direct Investment," Economic Research and Analysis Division (ERAD) 99-02, World Trade Organization. Economic Research and Analysis Division (ERAD).
  2. Drabek, Z. & Payne, W., 1999. "The Impact of Transparency on Foreign Direct Investment," Papers 99-02, Stanford - Institute for Thoretical Economics.
  3. Alberto Alesina & Beatrice Weder, 2002. "Do Corrupt Governments Receive Less Foreign Aid?," American Economic Review, American Economic Association, vol. 92(4), pages 1126-1137, September.
  4. 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.
  5. Joel S. Hellman & Geraint Jones & Daniel Kaufmann & Mark Schankerman, 2000. "Measuring governance and state capture: the role of bureaucrats and firms in shaping the business environment," Working Papers 51, European Bank for Reconstruction and Development, Office of the Chief Economist.
  6. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March.
  7. Smarzynska, Beata K. & Shang-Jin Wei, 2000. "Corruption and the composition of foreign direct investment - firm-level evidence," Policy Research Working Paper Series 2360, The World Bank.
  8. Theodore H. Moran, 1998. "Foreign Direct Investment and Development: The New Policy Agenda for Developing Countries and Economies in Transition," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 53.
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Cited by:
  1. Maria Del Mar Salinas-Jimenez & Javier Salinas-Jimenez, 2006. "Corruption and Productivity Growth in OECD Countries," ERSA conference papers ersa06p99, European Regional Science Association.

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