IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Illicit money flows as motives for FDI

  • Perez, M. Fabricio
  • Brada, Josef C.
  • Drabek, Zdenek

We examine the role of FDI in facilitating money laundering and illegal capital flight, focusing on transition economies’ FDI outflows because they largely reflect current investment decisions rather than the inertia of past decisions. We estimate a model of FDI outflows in which illicit money flows influence the volume of FDI directed toward countries considered to be centers of money laundering. We show that traditional models of FDI are not able to account for these investment flows and that our results are robust when additional explanatory variables such as host country tax rates, governance, corruption, and cultural differences between the home and host country are included in the model. We estimate that 6–10% of total FDI outflows and over 20% of FDI to money-laundering countries from our sample were made to facilitate illicit money flows.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Comparative Economics.

Volume (Year): 40 (2012)
Issue (Month): 1 ()
Pages: 108-126

in new window

Handle: RePEc:eee:jcecon:v:40:y:2012:i:1:p:108-126
Contact details of provider: Web page:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Sebnem Kalemli-Ozcan & Laura Alfaro & Vadym Volosovych, 2003. "Why doesn’t Capital Flow from Rich to Poor Countries? An Empirical Investigation," Working Papers 2003-01, Department of Economics, University of Houston.
  2. Devereux, Michael P & Lockwood, Ben & Redoano, Michela, 2002. "Do Countries Compete Over Corporate Tax Rates?," The Warwick Economics Research Paper Series (TWERPS) 642, University of Warwick, Department of Economics.
  3. Michael Devereux & Harold Freeman, 1995. "The impact of tax on foreign direct investment: Empirical evidence and the implications for tax integration schemes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 2(1), pages 85-106, February.
  4. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  5. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2007. "Cultural Biases in Economic Exchange?," Economics Working Papers ECO2007/42, European University Institute.
  6. Buchanan, Bonnie, 2004. "Money laundering--a global obstacle," Research in International Business and Finance, Elsevier, vol. 18(1), pages 115-127, April.
  7. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," William Davidson Institute Working Papers Series 63, William Davidson Institute at the University of Michigan.
  8. David L. Carr & James R. Markusen & Keith E. Maskus, 2001. "Estimating the Knowledge-Capital Model of the Multinational Enterprise," American Economic Review, American Economic Association, vol. 91(3), pages 693-708, June.
  9. Egger, Peter & Winner, Hannes, 2006. "How Corruption Influences Foreign Direct Investment: A Panel Data Study," Economic Development and Cultural Change, University of Chicago Press, vol. 54(2), pages 459-86, January.
  10. James R. Hines, Jr. & Eric M. Rice, 1990. "Fiscal Paradise: Foreign Tax Havens and American Business," NBER Working Papers 3477, National Bureau of Economic Research, Inc.
  11. Carstensen, Kai & Toubal, Farid, 2004. "Foreign direct investment in Central and Eastern European countries: A dynamic panel analysis," Munich Reprints in Economics 19965, University of Munich, Department of Economics.
  12. Walker John & Unger Brigitte, 2009. "Measuring Global Money Laundering: "The Walker Gravity Model"," Review of Law & Economics, De Gruyter, vol. 5(2), pages 821-853, December.
  13. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
  14. Markusen, James R., 1984. "Multinationals, multi-plant economies, and the gains from trade," Journal of International Economics, Elsevier, vol. 16(3-4), pages 205-226, May.
  15. Alvaro Cuervo-Cazurra & Mehmet Genc, 2008. "Transforming disadvantages into advantages: developing-country MNEs in the least developed countries," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 39(6), pages 957-979, September.
  16. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-81, August.
  17. Chander Kant, 2002. "What is Capital Flight?," The World Economy, Wiley Blackwell, vol. 25(3), pages 341-358, 03.
  18. Helpman, Elhanan, 1984. "A Simple Theory of International Trade with Multinational Corporations," Scholarly Articles 3445092, Harvard University Department of Economics.
  19. Friedrich Schneider & Ursula Windischbauer, 2010. "Money Laundering: Some Facts," Economics of Security Working Paper Series 25, DIW Berlin, German Institute for Economic Research.
  20. Desai, Mihir A. & Foley, C. Fritz & Hines, James Jr., 2006. "Do tax havens divert economic activity?," Economics Letters, Elsevier, vol. 90(2), pages 219-224, February.
  21. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  22. Markusen, James R & Maskus, Keith E, 2002. "Discriminating among Alternative Theories of the Multinational Enterprise," Review of International Economics, Wiley Blackwell, vol. 10(4), pages 694-707, November.
  23. Bruce A. Blonigen & Ronald B. Davies & Keith Head, 2002. "Estimating The Knowledge-Capital Model of the Multinational Enterprise: Comment," University of Oregon Economics Department Working Papers 2002-13, University of Oregon Economics Department, revised 01 Mar 2002.
  24. Büttner, Thiess & Ruf, Martin, 2004. "Tax Incentives and the Location of FDI: Evidence from a Panel of German Multinationals," ZEW Discussion Papers 04-76, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  25. Mohsin S. Khan & Nadeem Ul Haque, 1985. "Foreign Borrowing and Capital Flight: A Formal Analysis (Emprunt extérieur et évasion de capitaux: analyse mathématique) (Endeudamiento externo y fuga de capitales: Un análisis formal)," IMF Staff Papers, Palgrave Macmillan, vol. 32(4), pages 606-628, December.
  26. Kálmán Kalotay, 2004. "Outward FDI from Central and Eastern European Countries," Economic Change and Restructuring, Springer, vol. 37(2), pages 141-172, 06.
  27. Ruud A. de Mooij & Sjef Ederveen, 2008. "Corporate Tax Elasticities A Reader’s Guide to Empirical Findings," Working Papers 0822, Oxford University Centre for Business Taxation.
  28. Brada, Josef C. & Kutan, Ali M. & Yigit, Taner M., 2003. "The effects of transition and political instability on foreign direct investment: Central Europe and the Balkans," ZEI Working Papers B 28-2003, University of Bonn, ZEI - Center for European Integration Studies.
  29. Hermes, Niels & Lensink, Robert, 2001. "Capital flight and the uncertainty of government policies," Economics Letters, Elsevier, vol. 71(3), pages 377-381, June.
  30. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
  31. Dhammika Dharmapala & James R. Hines Jr., 2006. "Which Countries Become Tax Havens?," NBER Working Papers 12802, National Bureau of Economic Research, Inc.
  32. Wu, Shih-Ying, 2006. "Corruption and cross-border investment by multinational firms," Journal of Comparative Economics, Elsevier, vol. 34(4), pages 839-856, December.
  33. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
  34. Bevan, Alan A. & Estrin, Saul, 2004. "The determinants of foreign direct investment into European transition economies," Journal of Comparative Economics, Elsevier, vol. 32(4), pages 775-787, December.
  35. Oded Shenkar, 2001. "Cultural Distance Revisited: Towards a More Rigorous Conceptualization and Measurement of Cultural Differences," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 32(3), pages 519-535, September.
  36. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
  37. Edwin M. Truman & Peter Reuter, 2004. "Chasing Dirty Money: The Fight Against Anti-Money Laundering," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 381, January.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:jcecon:v:40:y:2012:i:1:p:108-126. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.