A Comparative Study on the Effects of Corruption on FDI

One of the most vivid discussions during the last century has been the progress of countries in terms of economic growth and the policy changes required to foster economic growth. It is argued that Foreign Direct Investments (FDI) in a country has a positive effect on economic growth and hence FDI is used as one of the conventional determinants of the economic growth of countries. It is therefore important to assess factors affecting FDI, since countries can then base their economic policies to foster FDI and hence to foster economic growth. Particularly, there are some factors which may reduce investors’ interest in one country, such as the level of corruption in the country. This study analyzes the relation between corruption and FDI based on the data in a comparative setting, highlighting the differences between a set of developed and developing countries in this context. The included developing countries are Brazil, Russia, India and China, also known as the BRIC countries. The included developed countries are The Netherlands, the USA, the United Kingdom and Japan. This thesis concerns two research topics. The first topic is the effect of corruption, measured by Corruption Perception Index (CPI), on the amount of FDI. The second topic is the possibly different effects of CPI index on developing and developed countries. The two research topics are analyzed using linear regression models and scenario analyses on the effects of corruption and other variables on FDI. The estimation results suggest that corruption does have an effect on FDI. This effect, however, is different between developing and developed countries.