Document Type

Article

Publication Date

2015

Abstract

This paper addresses how oil changes the corruption-foreign direct investment relationship. With the advantage of our panel data set, we are able to account for issues of endogeneity in the causality between foreign direct investment and corruption. We find that corruption has a negative impact on attracting foreign direct investment but this is mitigated based on the amount of oil the receiving country produces. Foreign direct investment inflows are found to reduce corruption in countries, but not if the receiving country is a major oil producer. Results show that poor countries without oil may be using institutional corruption to attract foreign direct investment and that receiving these investments is reinforcing this corruption. The paper’s analysis implies that oil is not only helping more corrupt regimes to attract foreign direct investment, it is also reducing the generally positive institutional benefits from receiving foreign direct investment that most middle and high-income countries receive. The analysis suggests a reinforcing relationship between corruption and foreign direct investment, which could lead to positive or negative spirals in institutional quality. Firms and international organizations must take account of the negative institutional side effects from investing in oil rich countries or when dealing with very poor governments.

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