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

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Abstract

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.

Suggested Citation

  • Stephane Straub, 2005. "Opportunism, Corruption and the Multinational Firm's Mode of Entry," ESE Discussion Papers 102, Edinburgh School of Economics, University of Edinburgh.
  • Handle: RePEc:edn:esedps:102
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    Cited by:

    1. Ramin Dadasov & Oliver Lorz, 2013. "Mode of International Investment and Endogenous Risk of Expropriation," Review of International Economics, Wiley Blackwell, vol. 21(5), pages 974-983, November.
    2. Frank L. BARTELS & Markus EICHER & Christopher BACHTROG & Gorazd REZONJA, 2009. "Foreign Direct Investment In Sub-Saharan Africa: Changing Location-Specific Advantages As Signals Of Competitiveness," The Developing Economies, Institute of Developing Economies, vol. 47(3), pages 244-278.
    3. Emmanuelle Auriol & Stéphane Straub, 2011. "Privatization of Rent-Generating Industries and Corruption," Chapters,in: International Handbook on the Economics of Corruption, Volume Two, chapter 7 Edward Elgar Publishing.
    4. Graf Lambsdorff, Johann, 2005. "Consequences and causes of corruption: What do we know from a cross-section of countries?," Passauer Diskussionspapiere, Volkswirtschaftliche Reihe V-34-05, University of Passau, Faculty of Business and Economics.
    5. Sanjo, Yasuo, 2012. "Country risk, country size, and tax competition for foreign direct investment," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 292-301.
    6. Guasch, J. Luis & Laffont, Jean-Jacques & Straub, Stephane, 2005. "Infrastructure concessions in Latin America : government-led renegotiations," Policy Research Working Paper Series 3749, The World Bank.
    7. Yerrabati, Sridevi & Hawkes, Denise Donna, 2016. "Institutions and Investment in the South and East Asia and Pacific Region: Evidence from Meta-Analysis," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 10, pages 1-48.

    More about this item

    Keywords

    FDI; debt; multinational firms; capital flows; expropriation; corruption;

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance

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