Corruption and the Composition of Foreign Direct Investment : Firm-Level Evidence
The authors study the impact of corruption in a host country on foreign investors' preference for a joint venture, or a wholly owned subsidiary. Their simple model highlights a basic tradeoff in using local partners. On the one hand, corruptio...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
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World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2000/06/437403/corruption-composition-foreign-direct-investment-firm-level-evidence http://hdl.handle.net/10986/19836 |
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okr-10986-198362021-04-23T14:03:46Z Corruption and the Composition of Foreign Direct Investment : Firm-Level Evidence Smarzynska, Beata K. Wei, Shang-Jin ADMINISTRATIVE EXPENDITURE AGGREGATING GOVERNANCE INDICATORS BRIBERY BUREAUCRACY CAPITAL CITIES CAPITAL FLOWS CODES CORRUPT COUNTRIES CORRUPT PRACTICES CORRUPTION CORRUPTION LEVELS CORRUPTION PERCEPTIONS CORRUPTION VARIABLE DECREE DEGREE OF CORRUPTION DIRECT INVESTMENT INFLOWS ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT EXPENDITURE FDI FIGHTING CORRUPTION FIRM SIZE FOREIGN DIRECT INVESTMENT FOREIGN FIRMS FOREIGN INVESTMENT FOREIGN INVESTORS FOREIGN OWNERSHIP FOREIGN PARTICIPATION FOREIGN PARTNER GCR GOVERNMENT OFFICIALS HOST COUNTRIES HOST COUNTRY HOST____COUNTRY INTELLECTUAL PROPERTY INTERNATIONAL DEVELOPMENT INTERNATIONAL ECONOMICS INTERNATIONAL INVESTMENT INTERNATIONAL INVESTORS INTERNATIONAL TRADE INWARD FOREIGN DIRECT INVESTMENT LEGISLATION MANUFACTURING SECTORS MARKET ECONOMY MARKET SIZE MULTINATIONAL ENTERPRISES NATIONAL GOVERNMENTS NATIONS NATURAL RESOURCES PERCEPTIONS INDEX PRIVATISATION PRIVATIZATION PROPERTY RIGHTS PUBLIC OFFICIALS PUBLISHERS PURCHASING POWER STATEMENTS TAX RATE TAX RATES TECHNOLOGICAL SOPHISTICATION TECHNOLOGY TRANSFER TRANSITION ECONOMIES TRANSPARENCY The authors study the impact of corruption in a host country on foreign investors' preference for a joint venture, or a wholly owned subsidiary. Their simple model highlights a basic tradeoff in using local partners. On the one hand, corruption makes the local bureaucracy less transparent, and increases the value of using a local partner to cut through the bureaucratic maze. On the other hand, corruption decreases the effective protection of an investors' intangible assets, and reduces the probability that disputes between foreign and domestic partners, will be adjudicated fairly, which reduces the value of having a local partner. As the investor's technological sophistication increases, so does the importance of protecting intangible assets, which tilts the preference away from joint ventures in a corrupt country. Empirical tests of this hypothesis on firm-level data show that corruption reduces inward foreign direct investment, and shifts the ownership structure toward joint ventures. Conditional on foreign direct investment taking place, an increase in corruption from the level found in Hungary to that found in Azerbaijan, decreases the probability of a wholly owned subsidiary by 10 to 20 percent. Technologically more advanced firms are less likely to engage in joint ventures, however. The authors find support for the view that U.S. firms are more averse to joint ventures in corrupt countries than other foreign investors - possibly because the U.S. Foreign corrupt Practices Act, which stipulates penalties for executives of U.S. companies whose employees, or local partners engage in paying bribes. But although U.S. companies are more likely than investors from other countries to retain full ownership of firms in corrupt countries, they are not less likely than firms from other countries to undertake foreign direct investment in those countries. 2014-08-28T18:37:50Z 2014-08-28T18:37:50Z 2000-06 http://documents.worldbank.org/curated/en/2000/06/437403/corruption-composition-foreign-direct-investment-firm-level-evidence http://hdl.handle.net/10986/19836 English en_US Policy Research Working Paper;No. 2360 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research Azerbaijan Hungary |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
ADMINISTRATIVE EXPENDITURE AGGREGATING GOVERNANCE INDICATORS BRIBERY BUREAUCRACY CAPITAL CITIES CAPITAL FLOWS CODES CORRUPT COUNTRIES CORRUPT PRACTICES CORRUPTION CORRUPTION LEVELS CORRUPTION PERCEPTIONS CORRUPTION VARIABLE DECREE DEGREE OF CORRUPTION DIRECT INVESTMENT INFLOWS ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT EXPENDITURE FDI FIGHTING CORRUPTION FIRM SIZE FOREIGN DIRECT INVESTMENT FOREIGN FIRMS FOREIGN INVESTMENT FOREIGN INVESTORS FOREIGN OWNERSHIP FOREIGN PARTICIPATION FOREIGN PARTNER GCR GOVERNMENT OFFICIALS HOST COUNTRIES HOST COUNTRY HOST____COUNTRY INTELLECTUAL PROPERTY INTERNATIONAL DEVELOPMENT INTERNATIONAL ECONOMICS INTERNATIONAL INVESTMENT INTERNATIONAL INVESTORS INTERNATIONAL TRADE INWARD FOREIGN DIRECT INVESTMENT LEGISLATION MANUFACTURING SECTORS MARKET ECONOMY MARKET SIZE MULTINATIONAL ENTERPRISES NATIONAL GOVERNMENTS NATIONS NATURAL RESOURCES PERCEPTIONS INDEX PRIVATISATION PRIVATIZATION PROPERTY RIGHTS PUBLIC OFFICIALS PUBLISHERS PURCHASING POWER STATEMENTS TAX RATE TAX RATES TECHNOLOGICAL SOPHISTICATION TECHNOLOGY TRANSFER TRANSITION ECONOMIES TRANSPARENCY |
| spellingShingle |
ADMINISTRATIVE EXPENDITURE AGGREGATING GOVERNANCE INDICATORS BRIBERY BUREAUCRACY CAPITAL CITIES CAPITAL FLOWS CODES CORRUPT COUNTRIES CORRUPT PRACTICES CORRUPTION CORRUPTION LEVELS CORRUPTION PERCEPTIONS CORRUPTION VARIABLE DECREE DEGREE OF CORRUPTION DIRECT INVESTMENT INFLOWS ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT EXPENDITURE FDI FIGHTING CORRUPTION FIRM SIZE FOREIGN DIRECT INVESTMENT FOREIGN FIRMS FOREIGN INVESTMENT FOREIGN INVESTORS FOREIGN OWNERSHIP FOREIGN PARTICIPATION FOREIGN PARTNER GCR GOVERNMENT OFFICIALS HOST COUNTRIES HOST COUNTRY HOST____COUNTRY INTELLECTUAL PROPERTY INTERNATIONAL DEVELOPMENT INTERNATIONAL ECONOMICS INTERNATIONAL INVESTMENT INTERNATIONAL INVESTORS INTERNATIONAL TRADE INWARD FOREIGN DIRECT INVESTMENT LEGISLATION MANUFACTURING SECTORS MARKET ECONOMY MARKET SIZE MULTINATIONAL ENTERPRISES NATIONAL GOVERNMENTS NATIONS NATURAL RESOURCES PERCEPTIONS INDEX PRIVATISATION PRIVATIZATION PROPERTY RIGHTS PUBLIC OFFICIALS PUBLISHERS PURCHASING POWER STATEMENTS TAX RATE TAX RATES TECHNOLOGICAL SOPHISTICATION TECHNOLOGY TRANSFER TRANSITION ECONOMIES TRANSPARENCY Smarzynska, Beata K. Wei, Shang-Jin Corruption and the Composition of Foreign Direct Investment : Firm-Level Evidence |
| geographic_facet |
Azerbaijan Hungary |
| relation |
Policy Research Working Paper;No. 2360 |
| description |
The authors study the impact of
corruption in a host country on foreign investors'
preference for a joint venture, or a wholly owned
subsidiary. Their simple model highlights a basic tradeoff
in using local partners. On the one hand, corruption makes
the local bureaucracy less transparent, and increases the
value of using a local partner to cut through the
bureaucratic maze. On the other hand, corruption decreases
the effective protection of an investors' intangible
assets, and reduces the probability that disputes between
foreign and domestic partners, will be adjudicated fairly,
which reduces the value of having a local partner. As the
investor's technological sophistication increases, so
does the importance of protecting intangible assets, which
tilts the preference away from joint ventures in a corrupt
country. Empirical tests of this hypothesis on firm-level
data show that corruption reduces inward foreign direct
investment, and shifts the ownership structure toward joint
ventures. Conditional on foreign direct investment taking
place, an increase in corruption from the level found in
Hungary to that found in Azerbaijan, decreases the
probability of a wholly owned subsidiary by 10 to 20
percent. Technologically more advanced firms are less likely
to engage in joint ventures, however. The authors find
support for the view that U.S. firms are more averse to
joint ventures in corrupt countries than other foreign
investors - possibly because the U.S. Foreign corrupt
Practices Act, which stipulates penalties for executives of
U.S. companies whose employees, or local partners engage in
paying bribes. But although U.S. companies are more likely
than investors from other countries to retain full ownership
of firms in corrupt countries, they are not less likely than
firms from other countries to undertake foreign direct
investment in those countries. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Smarzynska, Beata K. Wei, Shang-Jin |
| author_facet |
Smarzynska, Beata K. Wei, Shang-Jin |
| author_sort |
Smarzynska, Beata K. |
| title |
Corruption and the Composition of Foreign Direct Investment : Firm-Level Evidence |
| title_short |
Corruption and the Composition of Foreign Direct Investment : Firm-Level Evidence |
| title_full |
Corruption and the Composition of Foreign Direct Investment : Firm-Level Evidence |
| title_fullStr |
Corruption and the Composition of Foreign Direct Investment : Firm-Level Evidence |
| title_full_unstemmed |
Corruption and the Composition of Foreign Direct Investment : Firm-Level Evidence |
| title_sort |
corruption and the composition of foreign direct investment : firm-level evidence |
| publisher |
World Bank, Washington, DC |
| publishDate |
2014 |
| url |
http://documents.worldbank.org/curated/en/2000/06/437403/corruption-composition-foreign-direct-investment-firm-level-evidence http://hdl.handle.net/10986/19836 |
| _version_ |
1764441643867439104 |