The weak relation between foreign direct investment and corruption: a theoretical and econometric study

Foreign direct investment has become an important factor of development of economies in the last decades. However, its economic nature as well as its relationship with corruption has not yet been clarified in economic literature. Following previous theoretical research, mainly Dunning's eclectic model, this paper evaluates the econometric relationship between corruption and foreign direct investment by testing three theoretically-based hypotheses: that corruption perception indicator is a stationary variable, that the relationship between corruption and foreign direct investment stock is statistically weak and that changes in foreign direct investment stock do not Granger cause changes in corruption. The verification is based on unit root tests, panel co-integration and Granger causality models performed on data from the Transparency International, the World Bank and the Heritage Foundation and the UN Conference on Trade and Development (UNCTAD) for 94 countries for the years 1998-2007. The results show that there is no significant relationship between the two variables. Reprinted by permission of Sage Publications, Inc.