Abstract:
There is great debate if corruption deters or helps foreign direct investment (FDI). In my dissertation I forward this debate and offer two suggestions. The link between corruption and FDI is best observed at the FDI industrial level. I disaggregate FDI into three dependent variables: market-seeking, labor-seeking and raw materials-seeking FDI. Second I argue the relationship between FDI and corruption is affected by the prevailing political institutions in a host country. I include veto players as a measure of political institutions. I conduct quantitative analyses and results indicate that FDI is indeed a firm level decision. I find that for the most part corruption and weak political institutions are a deterrent to FDI, however, in raw materials-seeking corruption compensates the consequences of a defective bureaucracy and bad policies. These findings show that foreign investors invest in different host environments in pursuit of different institutional advantages. The positive relationship between weak political institutions and corruption on raw materials-seeking FDI should however, not be interpreted as an ultimate institutional advantage. Results indicate that corruption is an effective tool in the short-term only, in the long run, the positive effects of corruption on raw material-seeking FDI diminish indicating that a government's commitment to foreign investments is best signaled by legitimate government institutions.
