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Corruption and Cross-Border Investment: Firm-Level Evidence

Author

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  • Beata K. Smarzynska
  • Shang-Jin Wei

Abstract

This paper studies the impact of corruption on inward foreign direct investment using a unique firm-level data set. It examines two effects of corruption simultaneously: a reduction in the volume of foreign investment and a shift in the ownership structure. Corruption makes local bureaucracy less transparent and hence acts as a tax on foreign investors. Moreover, corruption affects the decision to take on a local partner. On the one hand, corruption increases the value of using a local partner to cut through the bureaucratic maze. On the other hand, corruption decreases the effective protection of investor???s intangible assets and lowers the probability that disputes between foreign and domestic partners will be adjudicated fairly, which reduces the value of having a local partner. The importance of protecting intangible assets increases with investor???s technological sophistication, which tilts the preference away from joint ventures in a corrupt country. Empirical evidence shows that corruption reduces inward FDI and shifts the ownership structure towards joint ventures. Technologically more advanced firms are found to be less likely to engage in joint ventures.

Suggested Citation

  • Beata K. Smarzynska & Shang-Jin Wei, 2002. "Corruption and Cross-Border Investment: Firm-Level Evidence," William Davidson Institute Working Papers Series 494, William Davidson Institute at the University of Michigan.
    • Handle: RePEc:wdi:papers:2002-494
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    References listed on IDEAS

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    More about this item

    Keywords

    Corruption; Foreign direct investment; Multinational firms;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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