Prague Economic Papers 2014, 23(4):474-492 | DOI: 10.18267/j.pep.494

The Weak Relation between Foreign Direct Investment and Corruption: A Theoretical and Econometric Study

Tomáš Evan1, Ilya Bolotov2
1 CIEE Prague and University of New York in Prague, Czech Republic (tomas_evan@hotmail.com).
2 University of Economics, Prague, Czech Republic (ilya.bolotov@vse.cz).

Foreign direct investment has become an important factor of development of economies in the last decades. However, its economic nature as well as its relationship with corruption has not yet been clarified in economic literature. Following previous theoretical research, mainly Dunning's eclectic model, this paper evaluates the econometric relationship between corruption and foreign direct investment by testing three theoretically-based hypotheses: that corruption perception indicator is a stationary variable, that the relationship between corruption and foreign direct investment stock is statistically weak and that changes in foreign direct investment stock do not Granger cause changes in corruption. The verification is based on unit root tests, panel co-integration and Granger causality models performed on data from the Transparency International, the World Bank and the Heritage Foundation and the UN Conference on Trade and Development (UNCTAD) for 94 countries for the years 1998-2007. The results show that there is no significant relationship between the two variables.

Keywords: foreign direct investment, corruption, Dunning eclectic model, unit root tests, panel Granger causality test, Choi meta-tests, panel co-integration
JEL classification: C12, C23, F21, F23

Published: January 1, 2014  Show citation

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Evan, T., & Bolotov, I. (2014). The Weak Relation between Foreign Direct Investment and Corruption: A Theoretical and Econometric Study. Prague Economic Papers, 23(4), 474-492. doi: 10.18267/j.pep.494
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