The politics of foreign direct investment: impacts on the host country corruption levels
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2022-11-21
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Mello, Eduardo Jordão de Achilles
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I analyze how foreign direct investment (FDI) influences the level of corruption in the host country. Most of the literature has been focused on the determinants of investment and the relationship between multinational companies (MNCs) and the host country. Nevertheless, the research on FDI has overlooked the institutional effects of FDI. I argue that the MNCs entrance and presence in the host country lead to higher corruption levels. MNCs crowd out domestic companies and increase market concentration. The lower domestic competition leads to higher economic rents for MNCs affiliates. Consequently, FDI inflows aggravate the incentives for demanding and accepting bribes. To test the hypothesis, I employ fixed-effects models to assess the relationship between the inflows of FDI and the levels of corruption in the host. The results indicate a negative relationship between FDI and corruption. Furthermore, the findings suggest that higher FDI inflows relate to lower levels of corruption in the host country. The results highlight significant impacts on policy-making and the prevention of corruption.