Linking In: Political Connections, Foreign Direct Investment and Corruption

• In Event: Experimental Approaches to IPE: Evidence from Survey and Field Experiments

Abstract

How do firms react to the prospect of corruption in host countries? Although researchers argue that corruption is a deterrent to investment, considerable investment continues to flow to corrupt states. I argue that corruption does not deter investment when investors are able to form political connections with government officials. Due to the clandestine nature of corrupt activity, corrupt in foreign direct investment is difficult to directly study using traditional data. To examine the relationship between corruption and foreign investment, I conduct a field experiment using a sample of 36,662 US and Canadian firms. In the field experiment, I manipulate expectations of political connections and expected corruption in host countries. I find that firms respond more favorably to investment opportunities in high corruption host countries when the expectation of political connections is present. These findings have broad implications for political economy research on corruption, foreign investment and corporate global strategy.

Author

• Andrey Tomashevskiy, Rutgers University