Fortune or Evil? The Effect of Inward Foreign Direct Investment on Corruption∗

Economic integration is a double-edged sword. It broadens the set of economic opportunities for individuals in countries embracing the global economy, and leads to the diffusion of ideas of good governance. Yet, some forms of integration are associated with the deterioration of local standards and practices. In this paper, we analyze how a specific form of economic integration, foreign di-rect investment (FDI), relates to a specific governance outcome in host countries: the prevalence of corruption. We argue that the relationship between inward FDI and corruption depends on the level of development of the host country. We test this non-linear relationship between FDI and corruption in an instrumental variable two-stage least squares setting. The results indicate that FDI is indeed associated with higher levels of corruption in less developed countries but not in developed countries. We also find that FDI is associated with higher levels of corruption in autoc-racies