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Corruption and Foreign Direct Investment: Firm-Level Evidence

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  • Javorcik, Beata
  • Wei, Shang-Jin

Abstract

This Paper studies the impact of corruption in a host country on a foreign investor’s preference for a joint venture versus a wholly owned subsidiary. A simple model highlights a basic trade-off in using local partners. On the one hand, corruption makes local bureaucracy less transparent and increases the value of using a local partner to cut through the bureaucratic maze. On the other hand, corruption decreases the effective protection of investor’s intangible assets and lowers the probability that disputes between foreign and domestic partners will be adjudicated fairly, which reduces the value of having a local partner. The importance of protecting intangible assets increases with investor’s technological sophistication, which tilts the preference away from joint ventures in a corrupt country. Empirical tests of the hypothesis on a firm-level data set show that corruption reduces inward FDI and shifts the ownership structure towards joint ventures. Conditional on FDI taking place, an increase in corruption from the Hungarian level to that of Azerbaijan decreases the probability of a wholly-owned subsidiary by 10-20%. Technologically more advanced firms are found to be less likely to engage in joint ventures. On the other hand, US firms are found to be more averse to joint ventures in corrupt countries than investors of other nationalities. This may be due to the US Foreign Corrupt Practices Act.

Suggested Citation

  • Javorcik, Beata & Wei, Shang-Jin, 2001. "Corruption and Foreign Direct Investment: Firm-Level Evidence," CEPR Discussion Papers 2967, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2967
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    References listed on IDEAS

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    3. Drabek, Zdenek & Payne, Warren, 2002. "The Impact of Transparency on Foreign Direct Investment," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 17, pages 777-810.
    4. Thierry Verdier, 2010. "Regional Integration, Fragility and Institution Building: An Analytical Framework Applied to the African Context," EUI-RSCAS Working Papers 38, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
    5. Yulia Gorbunova & Davide Infante & Janna Smirnova, 2012. "New Evidence on FDI Determinants: An Appraisal Over the Transition Period," Prague Economic Papers, Prague University of Economics and Business, vol. 2012(2), pages 129-149.
    6. Jean-Francois Arvis & Ronald E. Berenbeim, 2003. "Fighting Corruption in East Asia : Solutions from the Private Sector," World Bank Publications, The World Bank, number 14749, July.
    7. Deininger, Klaus & Mpuga, Paul, 2005. "Does Greater Accountability Improve the Quality of Public Service Delivery? Evidence from Uganda," World Development, Elsevier, vol. 33(1), pages 171-191, January.

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    More about this item

    Keywords

    composition of foreign direct investment; corruption; multinational firms;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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