Impact of corruption on FDI : A cross – country analysis

This paper analyses how corruption in a host country affects the amount of Foreign Direct Investment (FDI) it receives. It discusses a model in which FDI is explained by GDP, corruption and the distance between the host country and the origin of capital. It then runs a regression comparing FDI from developed to 46 developing countries, which shows that corruption is a significant variable and it does have a negative effect on total FDI. It then compares if there are any difference depending on the origin of Capital, comparing USA, Europe and Japan. Capital from USA is the most sensitive to corruption. It also shows that capital from Europe is the least responsive to distance, as a factor of explaining FDI. The paper also runs a base mark estimation of what could be expected if corruption levels changed. We can see that if Dominican Republic would have reduced the level of corruption to that of Uruguay, it could have increased the average FDI per year, from 0,8% of GDP to 1,4%. If Argentina, who has a higher FDI over GDP than expected given its level of corruption, would have reduced its level of corruption to the level of Chile, it could have increased the FDI over GDP from 2% to 3,6%. The implications of the results of this paper are that public policies should aim to reduce corruption levels because they have a negative effect on FDI and on the living standard