Corruption and Foreign Direct Investment Inflows: Evidence from West Africa

Abstract

Purpose: The study investigates the effect of corruption on FDI inflows to West Africa, and also establishes a threshold level of corruption for the sub-region. Design/Methodology/Approach: Using secondary data for the period 1999-2018, the study adopted a panel Autoregressive Distributed Lag (ARDL) model to carry out regression analysis. However, to ensure results accuracy and validity, a cross section dependence test, panel unit root test and panel cointegration test was carried out. Findings: The results indicated that in the long-run, corruption adversely affects the inflow of FDI to West Africa, thus lending support to the grabbing hand hypothesis. The study found the long-run threshold level of corruption for West Africa to be 6.3, indicating that below this level FDI inflow cannot be discouraged by corruption otherwise, FDI inflows could be discouraged. Research limitations/Implications: The findings from the study suggests that governments from West Africa should focus on mechanisms that will strongly discourage people from engaging in corruption, such as reducing the delays in business registration, strengthening and ensuring of effective monitoring of public institutions, as well as introducing the practice of penalty and exhortation in the public sector. Quality/Value: The present study contributes to the literature by investigating the effects of corruption on the inflow of FDI to West Africa using a more appropriate macro panel estimation technique, the panel Autoregressive Distributive Lag (ARDL) technique. Furthermore, it provides a threshold level for corruption on FDI inflows in West Africa.

The corruption-foreign direct investment nexus in sub-Saharan Africa. Fresh evidence from a panel threshold regression approach

“…Besides recent studies that have found support for either the “sand the wheels” hypothesis or the “grease the wheels” hypothesis, there are other studies that have found a non-linear corruption–FDI nexus, a corruption threshold effect or ambiguous results (Luu et al , 2019; Zangina and Hassan, 2020; Padmanabhan et al , 2020; Zander, 2021; Bekoe et al , 2021; Qureshi et al , 2021; Krifa-Schneider et al , 2022; Shaari et al , 2022). By gathering information from 131 nations, Luu et al (2019) looked into the effects of corruption on FDI and its two main entry points: greenfield investment (greenfield) and cross-border mergers and acquisitions (M&As).…”

“…Again, Bekoe et al (2021) examined how corruption affects FDI inflows to West Africa and establish a threshold level of corruption for the sub-region by using secondary data for the years 1999–2018. Regression analysis was performed using a panel autoregressive distributed lag (ARDL) model in the study.…”

Does corruption attract foreign direct investment inflows? Evidence from Tanzania

“…Additionally, corruption reduces property rights, a competitive environment, and transparency while increasing costs (Shaari et al, 2022;Al-Sadiq, 2009;Bekoe et al, 2021;Brada et al, 2012;Pupovic, 2012;Kersan-Skabic, 2013;Castro and Nunes, 2013;Quazi, 2014). However, a few studies (Bellos and Subasat, 2011;Helmy, 2013;Lestari et al, 2022) found that corruption had a statistically insignificant effect on FDI inflows.…”

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“…Also, the effect of foreign direct investment on unemployment differs from country to country and therefore results from such studies cannot be used to generalize and therefore the need to conduct a study using Ghana as case study. It is also worthwhile to mention that for the past two decades, Ghana is the second largest recipient of FDI in West Africa after Nigeria (Bekoe and Abdul Rahaman, 2021) and therefore choosing Ghana for this kind of study cannot be underestimated.…”