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How Does Corruption Influence the Effect of Foreign Direct Investment on Economic Growth?

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  • Okada, Keisuke
  • Samreth, Sovannroeun

Abstract

We investigate the effect of Foreign Direct Investment (FDI) on economic growth by employing the data of 132 countries for the period from 1995 to 2008, considering the role of corruption in each country as an absorptive factor. The estimation results indicate that, although FDI alone does not promote economic growth, it has a significant effect on economic growth if the interaction term between FDI and corruption is considered. The threshold level of corruption separating the negative and positive effects of FDI on economic growth is approximately in the 10th percentile from the least corrupt countries. The existence of a corruption threshold implies a counter-intuitive proposition: that FDI inhibits economic growth in countries where corruption is below a corruption threshold, and promotes economic growth in countries where corruption is above the threshold. Our results are robust even if we use different corruption indices and conduct the instrumental variable estimation to address endogeneity problems.

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  • Okada, Keisuke & Samreth, Sovannroeun, 2010. "How Does Corruption Influence the Effect of Foreign Direct Investment on Economic Growth?," MPRA Paper 27572, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:27572
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    Cited by:

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    2. Sailesh Tanna & Chengchun Li & Glauco De Vita, 2018. "The role of external debt in the foreign direct investment–growth relationship," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 23(4), pages 393-412, October.
    3. Hu, Dengfeng & You, Kefei & Esiyok, Bulent, 2021. "Foreign direct investment among developing markets and its technological impact on host: Evidence from spatial analysis of Chinese investment in Africa," Technological Forecasting and Social Change, Elsevier, vol. 166(C).
    4. Nam, Hyun-Jung & Bang, Jeongseok & Ryu, Doojin, 2023. "Paradox of trade openness: The moderated mediating role of governance," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
    5. Yilmaz BAYAR & Mahmut Unsal SASMAZ, 2019. "Foreign borrowing, foreign direct investment inflows and economic growth in European Union transition economies," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 10, pages 107-125, December.
    6. Jen‐Chung Mei, 2023. "Foreign direct investment and relative capacity: Theory and evidence," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(4), pages 1175-1214, October.
    7. Hakimi, Abdelaziz & Hamdi, Helmi, 2015. "How Corruption affect Growth in MENA region? Fresh Evidence from a Panel Cointegration Analysis," MPRA Paper 63750, University Library of Munich, Germany.
    8. Humaira Raffat & Danish Ahmed Siddiqui, 2020. "Does Openness, and Productivity Matters for FDI: A Global Interactive Analysis Based on the Complementary Role of Institutions," Issues in Economics and Business, Macrothink Institute, vol. 6(2), pages 1-21, December.
    9. Maurizio Lisciandra & Emanuele Millemaci, 2017. "The economic effect of corruption in Italy: a regional panel analysis," Regional Studies, Taylor & Francis Journals, vol. 51(9), pages 1387-1398, September.
    10. Nam, Hyun-Jung & Ryu, Doojin, 2023. "FDI and human development: The role of governance, ODA, and national competitiveness," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).
    11. Eric E. O. Opoku & Muazu Ibrahim & Yakubu A. Sare, 2018. "Foreign Direct Investment, Sectoral Effects and Economic Growth in Africa," Working Papers 769, Economic Research Southern Africa.
    12. Ishfaq Hamid & Md Shabbir Alam & Imran Ali Baig & Pabitra Kumar Jena, 2024. "Nexus Between Institutional Quality and Foreign Direct Investment Inflows: Panel Data Analysis of SAARC Countries," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 7993-8019, June.
    13. Mounir Belloumi & Atef Saad Alshehry, 2021. "The Causal Relationships Between Corruption, Investments and Economic Growth in GCC Countries," SAGE Open, , vol. 11(4), pages 21582440211, October.
    14. Phuong Thao Dang, 2019. "Sustainability comes from within: carbon dioxide emissions, FDI origin factor and institutional qualities in developing countries," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 36(2), pages 439-471, July.

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    More about this item

    Keywords

    Foreign Direct Investment; Economic Growth; Corruption;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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