Columbia International Affairs Online: Working Papers

CIAO DATE: 02/2009

Fortune or Evil? The Effects of Inward Foreign Direct Investment on Corruption

Pablo M. Pinto, Boliang Zhu

December 2008

Arnold A. Saltzman Institute of War and Peace Studies


This paper analyzes the relationship between inward foreign direct investment (FDI) and grand corruption in host countries. We argue that the effects of FDI on government corruption are conditional on the host country’s underlying economic and political climate: FDI will be associated with higher corruption levels in political and economic environments where competition is restriced. We adopt an empirical strategy aimed at dealing with the underlying endogeneity problem. We construct an instrument for inward FDI based on a measure of remoteness. We test our hypotheses on the conditional effects of FDI on corruption in an instrumental variable two-stage least-squares setting, finding preliminary support for our argument: the effect of FDI on corruption is positive in authoritarian and poor countries, and turns negative as countries develop and become more democratic. We also find that the marginal effect of FDI on corruption in democratic and rich countries is smaller.