Corruption and Foreign Direct Investment
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and
Direct
Foreign
Investment Mohsin Habib* UNIVERSITY OF MASSACHUSETTS, BOSTON
Leon Zurawicki** UNIVERSITY OF MASSACHUSETTS, BOSTON
This study examines the impact of corruption on foreign direct investment (FDI). First, the level of corruption in the host country is analyzed. Second, the absolute difference in the corruption level between the host and home country is examINTRODUCTION Since 1986, with the liberalization of the regimes in many FDI recipient countries, the volume of foreign direct investment (FDI) has been growing over 20% annually (WIR, 2001). Even though FDI is a popular subject in international business literature (see Caves, 1996; and Ensign, 1996), the recent surge in FDI demands new attention. Numerous statistical and econometric analyses addressed the spatial distribution of FDI and the underlying forces. Modeling FDI is a complicated task because so many variables intervene. Among explanatory variables, general economic phenomena are quantifiable and available. Others, like the quality of workforce, govern-
ined. The analysis provides support for the negative impacts of both. The results suggest that foreign investors generally avoid corruption because it is considered wrong and it can create operational inefficiencies. ment intervention,barriersto entryand competitiveclimate, are much less so. The analysisis furthercomplicated,as it is not clear at what stageof the FDIdecision-makingprocessspecificvariables are considered(Schniederjans,1999). One factor that has drawn attention latelyis corruptionin the host countries. Corruptionhas gained prominence as the contacts between less corruptand morecorruptcountriesintensifiedin the last decade.Corruptiondoes not seem to deterFDIin absoluteterms.China,Brazil, Thailand and Mexico attractlarge flows of FDIdespitetheirperceivedhigh corruption. Within the industrialized world,while Italyis perceivedrelatively corruptand receives modest inflows of
* Mohsin Habib is Assistant Professor of Management at the University of Massachusetts, Boston. His research interests include FDI and ethics in the context of multinationals. ** Leon Zurawicki is Professor of Marketing at the University of Massachusetts, Boston. His
interests focus on competition among multinational corporations and locus of their FDI. We wish to thank the anonymous referees and the editor for their valuable comments on earlier drafts of this paper. BUSINESSSTUDIES, 33, 2 (SECONDQUARTER2002): JOURNAL OF INTERNATIONAL
291-307
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ANDFDI CORRUPTION
The OLI paradigm (Dunning, 1988) provides guidance for FDI activities. The ownership (0) and internalization (I) advantages are derived from the exploitation of firm-specific resources and capa-
bilities, and the reduction in transaction costs. The third element, location (L) advantages, has attracted renewed attention due to (1) changes in the extent, character and geography of
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