How Corruption Influences Foreign Direct Investment: A Panel Data Study

Abstract

This article analyzes the sign and development of the effect of corruption on foreign direct investment (FDI). Economic theory distinguishes grabbing hand corruption from helping hand corruption. The former suggests a negative impact of corruption on FDI, the latter one a positive effect. Empirically, we apply a data set of 21 home and 59 developed and less developed host countries covering between 1983 and 1999. To investigate the corruption impact, we employ a panel data model that particularly refers to the knowledge‐capital model of multinational activity. We find a negative relationship between corruption and FDI. This, in turn, suggests that the helping hand effects of corruption are outweighed by the grabbing hand effects. Further, we observe that corruption is an important impediment of FDI in developed economies but not in less developed ones. Finally, we demonstrate that the importance of corruption has decreased over the years.