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Foreign direct investment, financial markets, and political corruption


  • Shady Kholdy
  • Ahmad Sohrabian


Purpose - The purpose of this paper is to investigate whether foreign direct investment (FDI) can stimulate financial development in countries with corrupt dominant élites. Financial markets have not been expanded in many developing countries despite their proven positive effect on economic growth. Although three voluminous and parallel lines of research investigate the impact of financial markets, FDI, and political corruption on economic growth, no research up to now has examined the combined effect of foreign investment and corruption on financial development. Design/methodology/approach - To investigate the causal links, a multivariate Error Correction Model (ECM) is applied on a sample of 22 developing countries, over the period of 1976-2003. Findings - Overall, the study provides some preliminary evidence that FDI may jump-start financial development in developing countries. Furthermore, the results indicate that most of the causal links are found in developing countries which experience a higher level of corruption in the form of excessive patronage, nepotism, job reservations, “favor-for-favors”, secret party funding, and suspiciously close ties between politics and business. Research limitations/implications - The study, however, does not provide any evidence that FDI can reduce political corruption. Much additional theoretical and empirical research is needed to explore whether FDI can influence political and economic traditions and stimulate financial markets. Originality/value - The study is the first empirical attempt to examine the causal link between FDI and financial markets in interaction with political corruption.

Suggested Citation

  • Shady Kholdy & Ahmad Sohrabian, 2008. "Foreign direct investment, financial markets, and political corruption," Journal of Economic Studies, Emerald Group Publishing, vol. 35(6), pages 486-500, October.
  • Handle: RePEc:eme:jespps:v:35:y:2008:i:6:p:486-500

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    Cited by:

    1. Jacob Kolster, 2015. "North Africa - Working paper - Does foreign direct investment improve welfare in North African countries?," Working Paper Series 2162, African Development Bank.
    2. Simplice Asongu, 2014. "Financial development dynamic thresholds of financial globalization: Evidence from Africa," Journal of Economic Studies, Emerald Group Publishing, vol. 41(2), pages 166-195, March.
    3. Ali T. Akarca & Aysit Tansel, 2016. "Voter reaction to government incompetence and corruption related to the 1999 earthquakes in Turkey," Journal of Economic Studies, Emerald Group Publishing, vol. 43(2), pages 309-335, May.
    4. Issouf Soumaré & Fulbert Tchana Tchana, 2015. "Causality between FDI and Financial Market Development: Evidence from Emerging Markets," World Bank Economic Review, World Bank Group, vol. 29(suppl_1), pages 205-216.
    5. Simplice Asongu & Vanessa Tchamyou, 2015. "The Comparative African Regional Economics of Globalization in Financial Allocation Efficiency," Working Papers 15/053, African Governance and Development Institute..
    6. Gohou, Gaston & Soumaré, Issouf, 2012. "Does Foreign Direct Investment Reduce Poverty in Africa and are There Regional Differences?," World Development, Elsevier, vol. 40(1), pages 75-95.
    7. Isaac Otchere & Issouf Soumaré & Pierre Yourougou, 2016. "FDI and Financial Market Development in Africa," The World Economy, Wiley Blackwell, vol. 39(5), pages 651-678, May.
    8. Simplice A Asongu, 2013. "How has politico-economic liberalization affected financial allocation efficiency? Fresh African evidence," Economics Bulletin, AccessEcon, vol. 33(1), pages 663-676.


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