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The Impact of Transparency on Foreign Direct Investment

  • Drabek, Z.
  • Payne, W.

Non-transparency is a term given in this paper to a set of government policies that increase the risk and uncertainty faced by economic actors foreign investors. This increase in risk and uncertainty stems from the presence of bribery and corruption, unstable economic policies, weak and poorly enforced property rights, and inefficient government institutions. Our empirical analysis shows that the degree of non-transparency is an important factor in a country's attractiveness to foreign investors. High levels of non-transparency can greatly retard the amount of foreign investment that a country might otherwise expect. The simulation exercise presented in the statistical part of this paper reveals that on average a country could expect 40 percent increase in FDI from a one point increase in their transparency ranking. Pari passu, non-transparent policies translate into lower levels of FDI and hence lower levels of welfare and efficiency in the host country's economy. A nation that takes steps to increase the degree of transparency in its policies and institutions could expect significant increases in the level of foreign investment into their country. This increased investment translates into more resources, which in turn increases social welfare and economic efficiency.

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Paper provided by Stanford - Institute for Thoretical Economics in its series Papers with number 99-02.

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Length: 34 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:fth:stante:99-02
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  1. Vito Tanzi & Hamid R Davoodi, 1997. "Corruption, Public Investment, and Growth," IMF Working Papers 97/139, International Monetary Fund.
  2. Dani Rodrik, 1996. "Why Do More Open Economies Have Bigger Governments?," NBER Working Papers 5537, National Bureau of Economic Research, Inc.
  3. Javorcik, Beata & Wei, Shang-Jin, 2001. "Corruption and Foreign Direct Investment: Firm-Level Evidence," CEPR Discussion Papers 2967, C.E.P.R. Discussion Papers.
  4. Hoekman, Bernard & Saggi, Kamal, 1999. "Multilateral disciplines for investment-related policies," Policy Research Working Paper Series 2138, The World Bank.
  5. Paolo Mauro, 1996. "The Effects of Corruptionon Growth, Investment, and Government Expenditure," IMF Working Papers 96/98, International Monetary Fund.
  6. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 681-712.
  7. V. Hugo Juan-Ramon & Carlos M. Asilis, 1994. "On Corruption and Capital Accumulation," IMF Working Papers 94/86, International Monetary Fund.
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