IDEAS home Printed from https://ideas.repec.org/a/spr/ijoeps/v19y2025i2d10.1007_s42495-025-00154-6.html
   My bibliography  Save this article

Foreign direct investment (FDI) and control of corruption: does good governance matter?

Author

Listed:
  • Farzana Naheed Khan

    (Quaid-i-Azam University)

Abstract

This study investigates the impact of foreign direct investment inflows on the control of corruption index (CCI) by incorporating the role of governance, using a panel of SAARC countries over the period 1996–2022. The study includes three dimensions of the quality of governance: economic, institutional and political governance and constructs a governance quality index through principal component analysis. Additionally, the study employs the generalized method of moments estimation technique with panel corrected standard errors to address the issues of unobserved heterogeneity among different countries, cross-sectional dependence in the data, and endogeneity among the variables. The study finds from non-interactive regressions that FDI negatively influences CCI while the quality of governance positively influences CCI. However, interactive regressions suggest that the interaction between FDI inflows and good governance supports the control of corruption. Based on these findings, it is concluded that good governance is a necessary condition through which FDI controls corruption. Since good governance complements FDI and supports the control of corruption, it is submitted that SAARC countries should pay attention to the improvement of their quality of governance in order to enhance the control of corruption.

Suggested Citation

  • Farzana Naheed Khan, 2025. "Foreign direct investment (FDI) and control of corruption: does good governance matter?," International Journal of Economic Policy Studies, Springer, vol. 19(2), pages 333-354, August.
    • Handle: RePEc:spr:ijoeps:v:19:y:2025:i:2:d:10.1007_s42495-025-00154-6
    DOI: 10.1007/s42495-025-00154-6
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s42495-025-00154-6
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s42495-025-00154-6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Felipe Larraín & José Tavares, 2004. "Does Foreign Direct Investment Decrease Corruption?," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 41(123), pages 217-230.
    2. Luisa Melo & Michael A. Quinn, 2015. "Oil. Foreign Direct Investment an d Corruption," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 9(1), pages 33-49.
    3. Isabel Faeth, 2009. "Determinants Of Foreign Direct Investment – A Tale Of Nine Theoretical Models," Journal of Economic Surveys, Wiley Blackwell, vol. 23(1), pages 165-196, February.
    4. Aidt, Toke & Dutta, Jayasri & Sena, Vania, 2008. "Governance regimes, corruption and growth: Theory and evidence," Journal of Comparative Economics, Elsevier, vol. 36(2), pages 195-220, June.
    5. Eugen Dimant & Guglielmo Tosato, 2018. "Causes And Effects Of Corruption: What Has Past Decade'S Empirical Research Taught Us? A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 32(2), pages 335-356, April.
    6. Chuck C Y Kwok & Solomon Tadesse, 2006. "The MNC as an agent of change for host-country institutions: FDI and corruption," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 37(6), pages 767-785, November.
    7. Herzfeld, Thomas & Weiss, Christoph, 2003. "Corruption and legal (in)effectiveness: an empirical investigation," European Journal of Political Economy, Elsevier, vol. 19(3), pages 621-632, September.
    8. Matthew Cole & Robert Elliott & Jing Zhang, 2009. "Corruption, Governance and FDI Location in China: A Province-Level Analysis," Journal of Development Studies, Taylor & Francis Journals, vol. 45(9), pages 1494-1512.
    9. Stephen Everhart & Jorge Martinez- Vazquez & Robert McNab, 2009. "Corruption, governance, investment and growth in emerging markets," Applied Economics, Taylor & Francis Journals, vol. 41(13), pages 1579-1594.
    10. Pierre-Guillaume Méon & Khalid Sekkat, 2005. "Does corruption grease or sand the wheels of growth?," Public Choice, Springer, vol. 122(1), pages 69-97, January.
    11. Treisman, Daniel, 2000. "The causes of corruption: a cross-national study," Journal of Public Economics, Elsevier, vol. 76(3), pages 399-457, June.
    12. Edmund J. Malesky & Dimitar D. Gueorguiev & Nathan M. Jensen, 2015. "Monopoly Money: Foreign Investment and Bribery in Vietnam, a Survey Experiment," American Journal of Political Science, John Wiley & Sons, vol. 59(2), pages 419-439, February.
    13. Rafael Di Tella & Alberto Ades, 1999. "Rents, Competition, and Corruption," American Economic Review, American Economic Association, vol. 89(4), pages 982-993, September.
    14. Frederico Cruz-Jesus & Tiago Oliveira & Fernando Bacao & Zahir Irani, 2017. "Assessing the pattern between economic and digital development of countries," Information Systems Frontiers, Springer, vol. 19(4), pages 835-854, August.
    15. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June.
    16. Billger, Sherrilyn M. & Goel, Rajeev K., 2009. "Do existing corruption levels matter in controlling corruption?: Cross-country quantile regression estimates," Journal of Development Economics, Elsevier, vol. 90(2), pages 299-305, November.
    17. Pranab Bardhan, 1997. "Corruption and Development: A Review of Issues," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1320-1346, September.
    18. Gerring, John & Thacker, Strom C., 2005. "Do Neoliberal Policies Deter Political Corruption?," International Organization, Cambridge University Press, vol. 59(1), pages 233-254, January.
    19. Habeeb Abdulrauf Salihu, 2021. "Corruption: an impediment to good governance," Journal of Financial Crime, Emerald Group Publishing Limited, vol. 29(1), pages 101-110, February.
    20. Vito Tanzi, 1998. "Corruption Around the World: Causes, Consequences, Scope, and Cures," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 559-594, December.
    21. Atsushi Fukumi & Shoji Nishijima, 2010. "Institutional quality and foreign direct investment in Latin America and the Caribbean," Applied Economics, Taylor & Francis Journals, vol. 42(14), pages 1857-1864.
    22. Sandholtz, Wayne & Gray, Mark M., 2003. "International Integration and National Corruption," International Organization, Cambridge University Press, vol. 57(4), pages 761-800, October.
    23. Boliang Zhu, 2017. "MNCs, Rents, and Corruption: Evidence from China," American Journal of Political Science, John Wiley & Sons, vol. 61(1), pages 84-99, January.
    24. Mr. Vito Tanzi, 1998. "Corruption Around the World: Causes, Consequences, Scope, and Cures," IMF Working Papers 1998/063, International Monetary Fund.
    25. Aiman Sana & Farzana Naheed Khan & Umaima Arif, 2022. "ICT diffusion and climate change: The role of economic growth, financial development and trade openness," Netnomics, Springer, vol. 22(2), pages 179-194, October.
    26. Farzana Naheed Khan & Eatzaz Ahmad, 2022. "Intertemporal substitution in import demand and the role of habit formation: an application of Euler equation approach for Pakistan," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 21(1), pages 95-124, January.
    27. Christopher J. Robertson & Andrew Watson, 2004. "Corruption and change: the impact of foreign direct investment," Strategic Management Journal, Wiley Blackwell, vol. 25(4), pages 385-396, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:pdn:wpaper:79 is not listed on IDEAS
    2. Olmos, Lorena & Bellido, Héctor & Román-Aso, Juan A., 2020. "The effects of mega-events on perceived corruption," European Journal of Political Economy, Elsevier, vol. 61(C).
    3. repec:pdn:wpaper:70 is not listed on IDEAS
    4. Pieroni, L. & d'Agostino, G., 2013. "Corruption and the effects of economic freedom," European Journal of Political Economy, Elsevier, vol. 29(C), pages 54-72.
    5. repec:hhs:bofitp:2009_005 is not listed on IDEAS
    6. Gabriel Caldas Montes & Paulo Henrique Luna, 2021. "Fiscal transparency, legal system and perception of the control on corruption: empirical evidence from panel data," Empirical Economics, Springer, vol. 60(4), pages 2005-2037, April.
    7. Goel, Rajeev K. & Korhonen, Iikka, 2011. "Exports and cross-national corruption: A disaggregated examination," Economic Systems, Elsevier, vol. 35(1), pages 109-124, March.
    8. Gamze Kargin-Akkoc & Dilek Durusu-Ciftci, 2024. "The Interrelationship Between Corruption, Economic Growth, and Trade: Do They Grease or Sand Each Other’s Wheels?," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 22(4), pages 977-999, December.
    9. Antonietti, Roberto & Mondolo, Jasmine, 2023. "Inward FDI and the quality of domestic institutions: A cross-country panel VAR analysis," Economic Systems, Elsevier, vol. 47(3).
    10. Andrew Hodge & Sriram Shankar & D. S. Prasada Rao & Alan Duhs, 2011. "Exploring the Links Between Corruption and Growth," Review of Development Economics, Wiley Blackwell, vol. 15(3), pages 474-490, August.
    11. Judge, William Q. & McNatt, D. Brian & Xu, Weichu, 2011. "The antecedents and effects of national corruption: A meta-analysis," Journal of World Business, Elsevier, vol. 46(1), pages 93-103, January.
    12. Goel, Rajeev K. & Korhonen, Iikka, 2011. "Exports and cross-national corruption: A disaggregated examination," Economic Systems, Elsevier, vol. 35(1), pages 109-124, March.
    13. Kodila Tedika, Oasis, 2012. "Empirical Survey on the Causes of the Corruption [Aperçu empirique sur les causes de la corruption]," MPRA Paper 41484, University Library of Munich, Germany.
    14. Blackburn, Keith & Forgues-Puccio, Gonzalo F., 2009. "Why is corruption less harmful in some countries than in others?," Journal of Economic Behavior & Organization, Elsevier, vol. 72(3), pages 797-810, December.
    15. Graziella Bonanno & Lucia Errico & Nadia Fiorino & Roberto Ricciuti, 2025. "The impact of government size on corruption: A meta‐regression analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 39(4), pages 1727-1757, September.
    16. Keith Blackburn & Rashmi Sarmah, 2006. "Red Tape, Corruption and Finance," Economics Discussion Paper Series 0639, Economics, The University of Manchester.
    17. Michael Breen & Robert Gillanders, 2012. "Corruption, institutions and regulation," Economics of Governance, Springer, vol. 13(3), pages 263-285, September.
    18. Eugen Dimant & Guglielmo Tosato, 2018. "Causes And Effects Of Corruption: What Has Past Decade'S Empirical Research Taught Us? A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 32(2), pages 335-356, April.
    19. 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).
    20. Aisha Ismail & Kashif Rashid, 2014. "Time series analysis of the nexus among corruption, political instability and judicial inefficiency in Pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 48(5), pages 2757-2771, September.
    21. Choudhury, Sanchari, 2019. "WTO membership and corruption," European Journal of Political Economy, Elsevier, vol. 60(C).
    22. Blaise Gnimassoun, Joseph Keneck Massil, 2019. "Determinants of corruption: can we put all countries in the same basket?," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 16(2), pages 239-276, December.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:ijoeps:v:19:y:2025:i:2:d:10.1007_s42495-025-00154-6. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.