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Far From Home: Do Foreign Investors Import Higher Standards of Governance in Transition Economies?

Author

Listed:
  • Joel S. Hellman

    (The World Bank)

  • Geraint Jones

    (MIT)

  • Daniel Kaufmann

    (The World Bank Institute)

Abstract

Based on the Business Environment and Enterprise Performance Survey (BEEPS) of firms in transition countries, which unbundles corruption to measure different types of corrupt transactions and provide detailed information on the characteristics and performance of firms, we find that: i) corruption reduces FDI inflows and attracts lower quality investment in terms of governance standards; ii) in misgoverned settings, FDI firms may magnify the problems of state capture and procurement kickbacks, while paying a lower overall bribe burden than domestic firms; iii) FDI firms undertake those forms of corruption that suit their comparative advantages, generating substantial gains for them and challenging the premise that they are coerced, which makes it difficult to develop effective constraints on such behavior; and, iv) transnational legal restrictions to prevent bribery had not led to higher standards of corporate conduct among foreign investors by the year 2000. Rather than being construed as a case against foreign investment; we argue that state capture is created and maintained through restrictions on competition and entry in strategic sectors. Thus, enhancing competition by attracting a wider, more diverse set of FDI firms is critical to the broader strategic framework of fighting state capture and corruption.

Suggested Citation

  • Joel S. Hellman & Geraint Jones & Daniel Kaufmann, 2003. "Far From Home: Do Foreign Investors Import Higher Standards of Governance in Transition Economies?," Development and Comp Systems 0308006, EconWPA.
  • Handle: RePEc:wpa:wuwpdc:0308006
    Note: Type of Document - Acrobat PDF; pages: 28
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    File URL: http://econwpa.repec.org/eps/dev/papers/0308/0308006.pdf
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    References listed on IDEAS

    as
    1. Theodore H. Moran, 1998. "Foreign Direct Investment and Development: The New Policy Agenda for Developing Countries and Economies in Transition," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 53.
    2. Drabek, Zdenek & Payne, Warren, 2002. "The Impact of Transparency on Foreign Direct Investment," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 17, pages 777-810.
    3. Alberto Alesina & Beatrice Weder, 2002. "Do Corrupt Governments Receive Less Foreign Aid?," American Economic Review, American Economic Association, vol. 92(4), pages 1126-1137, September.
    4. repec:zbw:wtowps:99-02 is not listed on IDEAS
    5. Smarzynska, Beata K. & Shang-Jin Wei, 2000. "Corruption and the composition of foreign direct investment - firm-level evidence," Policy Research Working Paper Series 2360, The World Bank.
    6. Beata K. Smarzynska & Shang-Jin Wei, 2000. "Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence," NBER Working Papers 7969, National Bureau of Economic Research, Inc.
    7. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Maria Del Mar Salinas-Jimenez & Javier Salinas-Jimenez, 2006. "Corruption and Productivity Growth in OECD Countries," ERSA conference papers ersa06p99, European Regional Science Association.

    More about this item

    Keywords

    foreign direct investment; FDI; kickbacks; state capture; bribery; corporate governance; corruption; governance; transition economies;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • H0 - Public Economics - - General
    • K0 - Law and Economics - - General
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • P2 - Economic Systems - - Socialist Systems and Transition Economies
    • P5 - Economic Systems - - Comparative Economic Systems
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • P0 - Economic Systems - - General
    • H4 - Public Economics - - Publicly Provided Goods
    • K2 - Law and Economics - - Regulation and Business Law
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior

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