Corruption and the Composition of Foreign Direct Investment : Firm-Level Evidence
The authors study the impact of corruption in a host country on foreign investors' preference for a joint venture, or a wholly owned subsidiary. Their simple model highlights a basic tradeoff in using local partners. On the one hand, corruptio...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/06/437403/corruption-composition-foreign-direct-investment-firm-level-evidence http://hdl.handle.net/10986/19836 |
| Summary: | The authors study the impact of
corruption in a host country on foreign investors'
preference for a joint venture, or a wholly owned
subsidiary. Their simple model highlights a basic tradeoff
in using local partners. On the one hand, corruption makes
the local bureaucracy less transparent, and increases the
value of using a local partner to cut through the
bureaucratic maze. On the other hand, corruption decreases
the effective protection of an investors' intangible
assets, and reduces the probability that disputes between
foreign and domestic partners, will be adjudicated fairly,
which reduces the value of having a local partner. As the
investor's technological sophistication increases, so
does the importance of protecting intangible assets, which
tilts the preference away from joint ventures in a corrupt
country. Empirical tests of this hypothesis on firm-level
data show that corruption reduces inward foreign direct
investment, and shifts the ownership structure toward joint
ventures. Conditional on foreign direct investment taking
place, an increase in corruption from the level found in
Hungary to that found in Azerbaijan, decreases the
probability of a wholly owned subsidiary by 10 to 20
percent. Technologically more advanced firms are less likely
to engage in joint ventures, however. The authors find
support for the view that U.S. firms are more averse to
joint ventures in corrupt countries than other foreign
investors - possibly because the U.S. Foreign corrupt
Practices Act, which stipulates penalties for executives of
U.S. companies whose employees, or local partners engage in
paying bribes. But although U.S. companies are more likely
than investors from other countries to retain full ownership
of firms in corrupt countries, they are not less likely than
firms from other countries to undertake foreign direct
investment in those countries. |
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