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Zander, T.: Does corruption matter for FDI flows in the OECD? A gravity analysis

Zander, T.: Does corruption matter for FDI flows in the OECD? A gravity analysis

JEL classification: C33, D73, F21, F23

Key words: Foreign Direct Investment, Corruption, Gravity Model, PPML

 

Summary: 

In this paper, the effect of corruption on foreign direct investment (FDI) flows is analyzed. The literature is thus far divided regarding the effects of corruption: One hypothesis argues that corruption greases the wheels of government and is therefore beneficial while the other hypothesis argues that it sands the wheels of government leading to suboptimal results in an economy. For the empirical analysis, a dataset consisting of bilateral FDI data from the OECD and the control of corruption measure from the World Governance Indicators of the World Bank is compiled. To further analyze the effects of corruption the Panama Papers revelation is used as a corruption increasing event and the implementation into law of the OECD Anti-Bribery Convention is used as a corruption decreasing event. Finally, the difference between corruption levels in the target and the origin country, will be examined. Then, a gravity model with dyadic and time-fixed effects is employed to analyze the data. Findings are ambiguous in that corruption is positively correlated with FDI inflows in the target country and negatively correlated with FDI inflows in the origin country. The Panama Papers variable shows strong evidence, that the release of the Panama Papers resulted in a drop in FDI flows. Therefore, it seems that corruption has complex country specific effects and that target and source countries have to adopt varying policies with regards to corruption. The general effect of corruption harms FDI flows, as shown by the Panama Papers revelation. 

 

 

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Zander, T.: Does corruption matter for FDI flows in the OECD? A gravity analysis

Zander, T.: Does corruption matter for FDI flows in the OECD? A gravity analysis

JEL classification: C33, D73, F21, F23

Key words: Foreign Direct Investment, Corruption, Gravity Model, PPML

 

Summary: 

In this paper, the effect of corruption on foreign direct investment (FDI) flows is analyzed. The literature is thus far divided regarding the effects of corruption: One hypothesis argues that corruption greases the wheels of government and is therefore beneficial while the other hypothesis argues that it sands the wheels of government leading to suboptimal results in an economy. For the empirical analysis, a dataset consisting of bilateral FDI data from the OECD and the control of corruption measure from the World Governance Indicators of the World Bank is compiled. To further analyze the effects of corruption the Panama Papers revelation is used as a corruption increasing event and the implementation into law of the OECD Anti-Bribery Convention is used as a corruption decreasing event. Finally, the difference between corruption levels in the target and the origin country, will be examined. Then, a gravity model with dyadic and time-fixed effects is employed to analyze the data. Findings are ambiguous in that corruption is positively correlated with FDI inflows in the target country and negatively correlated with FDI inflows in the origin country. The Panama Papers variable shows strong evidence, that the release of the Panama Papers resulted in a drop in FDI flows. Therefore, it seems that corruption has complex country specific effects and that target and source countries have to adopt varying policies with regards to corruption. The general effect of corruption harms FDI flows, as shown by the Panama Papers revelation. 

 

 

Zusammenfassung:

In diesem Aufsatz werden die Auswirkungen von Korruption auf die Ströme ausländischer Direktinvestitionen (FDI) analysiert. Bislang ist die Literatur hinsichtlich der Auswirkungen von Korruption gespalten: Die eine Hypothese argumentiert, dass Korruption die Räder der Regierung schmiert und daher vorteilhaft ist, während die andere Hypothese argumentiert, dass sie die Räder der Regierung schmiert und zu suboptimalen Ergebnissen in einer Volkswirtschaft führt. Für die empirische Analyse wird ein Datensatz zusammengestellt, der aus bilateralen FDI-Daten der OECD und dem Maß für die Kontrolle der Korruption aus den World Governance Indicators der Weltbank besteht. Zur weiteren Analyse der Auswirkungen der Korruption wird die Enthüllung der Panama Papers als korruptionserhöhendes Ereignis und die Umsetzung der OECD-Anti-Korruptions-Konvention in Gesetze als korruptionsreduzierendes Ereignis herangezogen. Schließlich wird der Unterschied zwischen dem Korruptionsniveau im Ziel- und im Herkunftsland untersucht. Dann wird ein Gravity-Modell mit dyadischen und zeitlich fixierten Effekten zur Analyse der Daten verwendet. Die Ergebnisse sind insofern mehrdeutig, als die Korruption positiv mit den FDI-Zuflüssen im Zielland und negativ mit den FDI-Zuflüssen im Ursprungsland korreliert ist. Die Variable Panama Papers zeigt deutliche Hinweise darauf, dass die Veröffentlichung der Panama Papers zu einem Rückgang der FDI-Zuflüsse führte. Daher scheint es, dass die Korruption komplexe länderspezifische Auswirkungen hat und dass Ziel- und Herkunftsländer eine unterschiedliche Politik in Bezug auf Korruption verfolgen müssen. Die allgemeinen Auswirkungen der Korruption schaden den FDI-Strömen, wie die Enthüllung der Panama Papers zeigt.  

 

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