Country-level investments and the effect of corruption -- some empirical evidence

Corporate boardrooms and the popular business press have suggested corruption as a negative factor affecting investment in countries. This study empirically examined the impact of corruption using data on foreign and local direct investments in 111 countries over a five-year period (1994-1998). The results support the negative effects of corruption on investments. It also highlights an important and so far overlooked distinction: the impact of corruption on local direct investments is substantially weaker than the impact on its foreign counterpart. Furthermore, the degree of international openness and the political stability of the host market moderate the influence of corruption. Implications of corruption for investment promotion agencies as well as the multinational corporations are discussed. Host government agencies should be concerned about image building and providing optimal incentives for businesses. Multinationals should consider managing risks and simultaneously gaining competitiveness on an international scale.

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