CIAO DATE: 02/2012
December 2011
Peterson Institute for International Economics
We argue that openness to foreign investment can have differential effects on corruption, even within the same country and under the exact same domestic institutions over time. Our theoretical approach departs from standard political economy by attributing corruption motives to firms as well as officials. Rather than interpreting bribes solely as a coercive “tax” imposed on business activities, we allow for the possibility that firms may be complicit in using bribes to enter protected sectors. Thus, we expect variation in bribe propensity across sectors according to expected profitability which we proxy with investment restrictions. Specifically, we argue that foreign investment will not be associated with corruption in sectors with fewer restrictions and more competition, but will increase dramatically as firms seek to enter restricted and uncompetitive sectors that offer higher rents. We test this effect using a list experiment, a technique drawn from applied psychology, embedded in a nationally representative survey of 10,000 foreign and domestic businesses in Vietnam. Our findings show that the impact of domestic reforms and economic openness on corruption is conditional on polices that restrict competition by limiting entry into the sector.
Resource link: Rent(s) Asunder: Sectoral Rent Extraction Possibilities and Bribery by Multinational Corporations [PDF] - 3.1M