Academic journal article The International Journal of Business and Finance Research

Oil, Foreign Direct Investment and Corruption

Academic journal article The International Journal of Business and Finance Research

Oil, Foreign Direct Investment and Corruption

Article excerpt


This paper addresses how oil changes the corruption-foreign direct investment relationship. With the advantage of our panel data set, we are able to account for issues of endogeneity in the causality between foreign direct investment and corruption. We find that corruption has a negative impact on attracting foreign direct investment but this is mitigated based on the amount of oil the receiving country produces. Foreign direct investment inflows are found to reduce corruption in countries, but not if the receiving country is a major oil producer. Results show that poor countries without oil may be using institutional corruption to attract foreign direct investment and that receiving these investments is reinforcing this corruption. The paper's analysis implies that oil is not only helping more corrupt regimes to attract foreign direct investment, it is also reducing the generally positive institutional benefits from receiving foreign direct investment that most middle and high-income countries receive. The analysis suggests a reinforcing relationship between corruption and foreign direct investment, which could lead to positive or negative spirals in institutional quality. Firms and international organizations must take account of the negative institutional side effects from investing in oil rich countries or when dealing with very poor governments.


KEYWORDS: Corruption, Foreign Direct Investment, Oil

(ProQuest: ... denotes formulae omitted.)


Foreign direct investment (FDI) is an important phenomenon in the global economy. Globally, FDI has grown from $2 trillion in 1990 to $19.1 trillion in 2010 (UNCTAD, 2012). Developing countries have been gaining both a larger absolute amount and share of FDI. The percentage of worldwide FDI going to developing countries has risen from 25 to 35 percent in the last twenty years (UNCTAD, 2012). The rising share of FDI going to developing countries brings up new issues. The institutional framework and its interaction with FDI are much different in developing and developed countries. In general, the perception of corruption is a much larger problem for developing countries than it is for developed ones.

There are many high profile examples of multinational firms facing criticism for their business dealings in developing countries vis-à-vis corruption. As expected, the most prominent media cases tend to involve multinational corporations (MNCs) either adding to or ignoring the high level of corruption in a developing country. A couple of the classic examples are Royal Dutch Shell (in Nigeria) and the United Fruit Company (in Latin America). Resource rents and the importance of property rights have led to commodity sectors often being the target of corruption scandals. However, there are recent examples such as Wal-Mart (in Mexico) and IBM (in China) which show that corruption can also be an issue for manufacturing, retail and/or service companies. The potential positive impact from MNCs instilling better business practices in developing countries tend not to become major media stories. This potential for positive and/or negative spillovers from multinationals investing in developing countries has become an important issue on the international business agenda (Meyer, 2004).

Not surprisingly, fighting corruption has become a major concern for many developing countries and multilateral institutions. One of the objectives of the World Bank is reducing corruption in developing countries. Countries such as India and Nigeria are heavily engaged in large scale, difficult campaigns against corruption in their countries. At the same time, there is a growing concern that foreign direct investment may be increasing opportunities for corruption in developing countries. Companies seeking market access or government contracts may have an incentive to bribe officials. Poorly paid officials may be tempted by the potentially large sums of money available from multinational firms. …

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