Money and Scandal: Foreign Firms, Investment and Corruption Scandals

• In Event: Local Effects of Trade and Foreign Investment Entry

Abstract

How does foreign direct investment (FDI) affect corruption in host countries? Research on the behavior of foreign firms suggests that foreign investment can perpetuate corrupt practices like bribery. I examine the corruption-FDI relationship with a new dataset on corruption scandals. Compared to perceptual measure of corruption, corruption scandals represent a more objective measure of corruption and can provide more information concerning the types of corrupt activities within a state. I use text analysis methods to automatically extract data on corruption scandals from newspaper articles for 50 countries, including both developing and developed states. Using firm-level data on investment project announcements, I find that foreign investment is associated with a higher incidence of corruption scandals. This research contributes to a more complete understanding of the political effects of foreign investment and is among the first to systematically examine corruption scandals on a wide cross-country basis.

Author

• Andrey Tomashevskiy, Rutgers University