Does foreign direct investment decrease corruption?

Felipe Larraín B., José Tavares

Research output: Contribution to journalArticle

47 Citations (Scopus)

Abstract

This paper assesses the effect of openness on corruption, using foreign direct investment (FDI) inflows as a measure of openness, after trade intensity is accounted for. We use a broad cross section of countries over the period 1970 to 1994 and address the issue of causality with a new set of instrumental variables relying on geographical and cultural distance between the FDI exporting and recipient countries. The economics literature has demonstrated that higher corruption levels discourage FDI. Here we study the reverse link, that is, how foreign direct investment impacts corruption. We find that FDI as a share of GDP is significantly associated with lower corruption levels, irrespective of import intensity levels. The quantitative impact of FDI on corruption appears to be of the same order of magnitude as that of per capita GDP.

Original languageEnglish
Pages (from-to)217-230
Number of pages14
JournalCuadernos de Economia - Latin American Journal of Economics
Volume41
Issue number123
Publication statusPublished - 2004

Keywords

  • Corruption
  • Foreign Direct Investment
  • Instrumental Variables
  • International Trade

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