Does FDI trigger or hinder corruption?

Corruption  has been one of the high priority that international organizations such as the IMF, World Bank, the UN and OECD have become increasingly interested in the fight against. More economists are involved in studying the effects of corruption on economic growth as it is perceived as a detrimental to economy and sustainable development path. One of the main transmission channel of corruption on growth is investment both domestic and international. There are a abundance of studies about how corruption affect investment especially foreign direct investment (FDI),  but very few studies on the reverse causality.

Because nowadays the world has become more integrated where globalization is booming as it would help the country with lack of growth or facing with some certain issues through foreign direct investment. FDI would help the developing countries to access capital, innovations, technological progress and know-how which finally enhance the development of the host country. Thus, having FDI in the country should be beneficial to the host. This is the reason why I am interested and would like to discuss how FDI would have an impact on corruption level of the host country.

It is quite well accepted in most of the literatures that high level of corruption is associated with low investment and FDI since when choosing the location for investment, the foreign investors do not only look at the economic fundamental such as new markets, natural resources, labor supply, etc., but also the political situations in the host country. Corruption creates negative national image which impedes international trade and discourages foreign investments leading to a decrease in foreign direct investments and capital flows. Nevertheless, the outcome of how FDI would change the corruption of the host country is rarely observed and remain questionable.

In short run, the more FDI in the country may lead to the higher level of corruption. Capital flowing into the country as a result of FDI would give the local officials more opportunities to get involve in corruption. The foreign investors eagerness and willingness to enter the market may ask the official to cut the line or obtain the permission or license and they would return the official’s help with bribe.

In contrast, FDI might hinder corruption in long-run as it would help shaping the institutional environment of the host country. More FDI inflows make the local market become more competitive, where firms have no excess profits, more obstacles to associate with bribery and corruption. Also, more FDI in the country make the local governors see how important of  the FDI to help boosting the country such as lower unemployment rate, more technological progress and other spillover effects. According to that, sometimes they need to apply international laws which also include anti-corruption act to welcome and encourage more FDI into the country. Thus, in long-term, the negative effects of corruption to business and local people is believed to be diluted.

However, this is only the expectation from the theoretical part and I may suggest for the further studies to investigate how FDI would  have an impact on corruption in empirical research.

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