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Opportunism, Corruption and the Multinational Firm's Mode of Entry

The paper models the boundaries of the multinational firm by looking at a simple trade-off between FDI (internal expansion with strong control rights) and debt (arm's length expansion with loose control rights) in the context of contractual incompleteness due to institutional constraints in host countries, i.e. problems of commitment and, especially, corruption. It develops a theoretical approach to the two main types of corruption: petty bureaucratic corruption and high-level political corruption. The model predicts that multinational firms prefer FDI the weaker the ability to commit of the host country, while both types of corruption shift the trade-off marginally toward debt. Cross-country panel empirical evidence supports these conclusions.

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File URL: http://www.econ.ed.ac.uk/papers/id102_esedps.pdf
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Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 102.

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Length: 45
Date of creation: 05 Jan 2005
Date of revision:
Handle: RePEc:edn:esedps:102
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  1. Kraay, Aart & Loayza, Norman & Servén, Luis & Ventura, Jaume, 2001. "Country Portfolios," CEPR Discussion Papers 2974, C.E.P.R. Discussion Papers.
  2. Rui Albuquerque, 2004. "The Composition of International Capital Flows: Risk Sharing Through Foreign Direct Investment," International Finance 0405004, EconWPA.
  3. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December.
  4. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier.
  5. Fosfuri, Andrea, 2000. "Patent protection, imitation and the mode of technology transfer," International Journal of Industrial Organization, Elsevier, vol. 18(7), pages 1129-1149, October.
  6. Kaufmann, Daniel, 2004. "Corruption, Governance and Security: Challenges for the Rich Countries and the World," MPRA Paper 8207, University Library of Munich, Germany.
  7. Blomström, Magnus & Kokko, Ari, 1996. "Multinational Corporations and Spillovers," CEPR Discussion Papers 1365, C.E.P.R. Discussion Papers.
  8. Itay Goldstein & Assaf Razin, 2005. "An Information-Based Trade Off between Foreign Direct Investment and Foreign Portfolio Investment," NBER Working Papers 11757, National Bureau of Economic Research, Inc.
  9. Bond, Eric W. & Samuelson, Larry, 1989. "Bargaining with commitment, choice of techniques, and direct foreign investment," Journal of International Economics, Elsevier, vol. 26(1-2), pages 77-97, February.
  10. Eckhard Janeba, 2001. "Attracting FDI in a Politically Risky World," NBER Working Papers 8400, National Bureau of Economic Research, Inc.
  11. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February.
  12. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
  13. Henisz, Witold J, 2000. "The Institutional Environment for Multinational Investment," Journal of Law, Economics and Organization, Oxford University Press, vol. 16(2), pages 334-64, October.
  14. Chris Doyle & Sweder Wijnbergen, 1994. "Taxation of foreign multinationals: A sequential bargaining approach to tax holidays," International Tax and Public Finance, Springer, vol. 1(3), pages 211-225, October.
  15. Sarno, Lucio & Taylor, Mark P., 1999. "Hot money, accounting labels and the permanence of capital flows to developing countries: an empirical investigation," Journal of Development Economics, Elsevier, vol. 59(2), pages 337-364, August.
  16. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
  17. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, June.
  18. Jean Tirole, 2003. "Inefficient Foreign Borrowing: A Dual- and Common-Agency Perspective," American Economic Review, American Economic Association, vol. 93(5), pages 1678-1702, December.
  19. Beata K. Smarzynska & Shang-Jin Wei, 2000. "Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence," NBER Working Papers 7969, National Bureau of Economic Research, Inc.
  20. Itay Goldstein & Assaf Razin, 2005. "Foreign Direct Investment vs. Foreiegn Portfolio Investment," NBER Working Papers 11047, National Bureau of Economic Research, Inc.
  21. Theodore H. Moran, 1998. "Foreign Direct Investment and Development: The New Policy Agenda for Developing Countries and Economies in Transition," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 53.
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