Corruption and the composition of foreign direct investment - firm-level evidence
The authors study the impact of corruption in a host country on foreign investors'preference for a joint venture, or a wholly owned subsidiary. Their simple model highlights a basic tradeoff in using local partners. On the one hand, corruption makes the 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 an investors'intangible assets, and reduces the probability that disputes between foreign and domestic partners, will be adjudicated fairly, which reduces the value of having a local partner. As the investor's technological sophistication increases, so does the importance of protecting intangible assets, which tilts the preference away from joint ventures in a corrupt country. Empirical tests of this hypothesis on firm-level data show that corruption reduces inward foreign direct investment, and shifts the ownership structure toward joint ventures. Conditional on foreign direct investment taking place, an increase in corruption from the level found in Hungary to that found in Azerbaijan, decreases the probability of a wholly owned subsidiary by 10 to 20 percent. Technologically more advanced firms are less likely to engage in joint ventures, however. The authors find support for the view that U.S. firms are more averse to joint ventures in corrupt countries than other foreign investors - possibly because the U.S. Foreign corrupt Practices Act, which stipulates penalties for executives of U.S. companies whose employees, or local partners engage in paying bribes. But although U.S. companies are more likely than investors from other countries to retain full ownership of firms in corrupt countries, they are not less likely than firms from other countries to undertake foreign direct investment in thosecountries.
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- 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.
- Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," NBER Working Papers 6030, National Bureau of Economic Research, Inc.
- Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," William Davidson Institute Working Papers Series 63, William Davidson Institute at the University of Michigan.
- Magnus Blomstrom & Mario Zejan, 1989. "Why Do Multinational Firms Seek Out Joint Ventures?," NBER Working Papers 2987, National Bureau of Economic Research, Inc.
- Elizabeth Asiedu & Hadi Salehi Esfahani, 2001. "Ownership Structure In Foreign Direct Investment Projects," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 647-662, November.
- Kaufman, Daniel & Shang-Jin Wei, 1999.
"Does"grease money"speed up the wheels of commerce?,"
Policy Research Working Paper Series
2254, The World Bank.
- Daniel Kaufmann & Shang-Jin Wei, 2000. "Does 'Grease Money' Speed Up the Wheels of Commerce?," IMF Working Papers 00/64, International Monetary Fund.
- Kaufmann, Daniel & Wei, Shang-Jin, 1999. "Does 'Grease Money' Speed Up the Wheels of Commerce?," MPRA Paper 8209, University Library of Munich, Germany.
- Daniel Kaufmann & Shang-Jin Wei, 1999. "Does "Grease Money" Speed Up the Wheels of Commerce?," NBER Working Papers 7093, National Bureau of Economic Research, Inc.
- Rafael Di Tella & Alberto Ades, 1999. "Rents, Competition, and Corruption," American Economic Review, American Economic Association, vol. 89(4), pages 982-993, September.
- Bruce Kogut & Harbir Singh, 1988. "The Effect of National Culture on the Choice of Entry Mode," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 19(3), pages 411-432, September.
- Shang-Jin Wei, 1997. "Why is Corruption So Much More Taxing Than Tax? Arbitrariness Kills," NBER Working Papers 6255, National Bureau of Economic Research, Inc.
- Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Aggregating governance indicators," Policy Research Working Paper Series 2195, The World Bank.
- Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August.
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