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Foreign Direct Investment and Economic Growth in EP and IS Countries: The Role of Corruption

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  • Yohane Khamfula

Abstract

Corruption is understood as an act in which the power of public office is used for personal gain in a manner that contravenes the rules established by the governing structures of a society. This study attempts to offer an extension to the empirical model employed by Balasubramanyam et al. (1996) by analysing how FDI determines economic growth within the new growth theory framework when the degree of corruption is considered. Thus, the study seeks to examine the way in which corruption can have an impact on the economic growth of developing countries whose trade strategies differ (either IS and EP). It suggests that further insight can be gained by considering how corruption might interact with the trade policy in affecting economic growth. This is examined using a fixed‐effects, simultaneous equation model for 17 countries over the period 1994–2004. The results show that the level of corruption strongly and negatively influences foreign direct investment in both IS and EP countries. However, when the corruption index is interacted with domestic investment, the influence on foreign direct investment is positive and significant for IS countries only. The most interesting outcome of the study is the effect of the interaction term between foreign direct investment and the corruption perception index on economic growth, which is found to be greater in magnitude for the EP countries than for the IS countries.

Suggested Citation

  • Yohane Khamfula, 2007. "Foreign Direct Investment and Economic Growth in EP and IS Countries: The Role of Corruption," The World Economy, Wiley Blackwell, vol. 30(12), pages 1843-1854, December.
    • Handle: RePEc:bla:worlde:v:30:y:2007:i:12:p:1843-1854
    DOI: 10.1111/j.1467-9701.2007.01055.x
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    1. Jagdish N. Bhagwati, 1978. "Appendix to "Foreign Trade Regimes and Economic Development: Anatomy and Consequences of Exchange Control Regimes"," NBER Chapters, in: Foreign Trade Regimes and Economic Development: Anatomy and Consequences of Exchange Control Regimes, pages 219-221, National Bureau of Economic Research, Inc.
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    4. Jagdish N. Bhagwati, 1978. "Foreign Trade Regimes and Economic Development: Anatomy and Consequences of Exchange Control Regimes," NBER Books, National Bureau of Economic Research, Inc, number bhag78-1, July.
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    Cited by:

    1. Jai S. Mah, 2017. "Globalization And Economic Growth In Cambodia," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 62(02), pages 363-375, June.
    2. John C. Anyanwu, 2012. "Why Does Foreign Direct Investment Go Where It Goes?: New Evidence From African Countries," Annals of Economics and Finance, Society for AEF, vol. 13(2), pages 425-462, November.
    3. Krifa-Schneider, Hadjila & Matei, Iuliana & Sattar, Abdul, 2022. "FDI, corruption and financial development around the world: A panel non-linear approach," Economic Modelling, Elsevier, vol. 110(C).
    4. John Anyanwu, 2011. "Working Paper 136 - Determinants of Foreign Direct Investment Inflows to Africa, 1980-2007," Working Paper Series 327, African Development Bank.
    5. Omer Ali Ibrahim & Sonal Devesh & Mughees Shaukat, 2022. "Institutional determinants of FDI in Oman: Causality analysis framework," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 4183-4195, October.
    6. Fofana Mory Fodé, 2014. "The Influence of Measures of Economic Freedom on FDI: A Comparison of Western Europe and Sub-Saharan Africa," Global Economy Journal, De Gruyter, vol. 14(3-4), pages 1-26, October.
    7. Yapatake Kossele Thales Pacific, 2015. "Foreign Direct Investment in Anglophone and Francophone African Countries," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 5(11), pages 337-350, November.
    8. Souadou Balde & Saidatou Dicko, 2018. "Is Good Governance Really a Significant Statistical Issue for Current African Economies? The Case of ECOWAS Countries," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(6), pages 75-89, June.
    9. Ștefan Cristian Gherghina & Liliana Nicoleta Simionescu & Oana Simona Hudea, 2019. "Exploring Foreign Direct Investment–Economic Growth Nexus—Empirical Evidence from Central and Eastern European Countries," Sustainability, MDPI, vol. 11(19), pages 1-33, September.
    10. Keisuke Okada & Sovannroeun Samreth, 2014. "How Does Corruption Influence the Effect of Foreign Direct Investment on Economic Growth?," Global Economic Review, Taylor & Francis Journals, vol. 43(3), pages 207-220, September.
    11. Hawkes, Denise Donna & Yerrabati, Sridevi, 2015. "Institutions and investment in South and East Asia & Pacific region: Evidence from meta-analysis," Economics Discussion Papers 2015-62, Kiel Institute for the World Economy (IfW Kiel).
    12. Muhammad Ahsan Ali Raza & Chen Yan & Hafiz Syed Mohsin Abbas & Atta Ullah, 2021. "Impact of institutional governance and state determinants on foreign direct investment in Asian economies," Growth and Change, Wiley Blackwell, vol. 52(4), pages 2596-2613, December.

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