How taxing is corruption on international investors

Abstract—This paper studies the effect of corruption on foreign direct investment. The sample covers bilateral investment from twelve source countries to 45 host countries. There are two central ndings. First, a rise in either the tax rate on multinational rms or the corruption level in a host country reduces inward foreign direct investment (FDI). In a benchmark estimation, an increase in the corruption level from that of Singapore to that of Mexico would have the same negative effect on inward FDI as raising the tax rate by fty percentage points. Second, American investors are averse to corruption in host countries, but not necessarily more so than average OECD investors, in spite of the U.S. Foreign Corrupt Practices Act of 1977. ‘‘We need to deal with the cancer of corruption.... We can give advice, encouragement, and support to govern-ments that wish to ght corruption—and it is these governments that, over time, will attract the larger volume of investment.’ ’ (Emphasis added)