The Impact of Corruption on FDI and Public Investment

The thesis examines the relationship between corruption and investment. Existing literature provides evidence that there is a negative relationship between corruption and investment. In particular, studies have found that corruption has a negative effect on Foreign Direct Investment (FDI). Whereas other studies have found that corruption increases the level of public investment, but not contributing to economic growth. This thesis examines the effect of corruption on FDI and public investment. The research will contribute to the literature by investigating a long time period from 1996 until 2011. Most studies use a very short dataset due to the limited data availability in the past. The second reason I employ a long period is based on the findings in the study by Judge et al. (2011), who suggests that the effect of corruption is larger in studies using data after the year 2000. Secondly, I will explore the indirect effect of corruption on FDI. Everhart et al. (2009) one of the few to examine the indirect relationship of corruption on FDI and public investment and recommends that this should be needs to be investigated more in detail. Furthermore, I use the two most widely used corruption measures available, the Control of Corruption Index (CCI) and the Corruption Perception Index (CPI). My main finding is that corruption does not have a significant effect on FDI. Furthermore, I find no evidence for an indirect of corruption through public investment. The second main result is that corruption does not have a significant effect on public investment.