Multinationals and Corruption: Business as Usual?

Abstract

This paper disentangles the e¤ects of corruption on entry mode decision by carrying out an empirical analysis with rich, …rm-level data on the activities of Swedish MNCs around the globe in manufacturing sectors from 1987 to 1998. A number of propositions emerge from a simple theoretical framework. The panorama of the results from the empirical part supports most of these propositions: (i). Corruption has a direct negative impact on green…eld investments and a weak positive impact on M&As. (ii). There are complex, asymmetric, secondary e¤ects of corruption on the mode of entry. (iii). International experience dampens the e¤ect of corruption on the mode of entry.(iv). The results are robust to di¤erences in measures of corruption. JEL Classi…cation: F23

The effect of corruption on FDI and its modes of entry

“…This measurement has been widely used in corruption-related research (i.e. Iwasaki and Suzuki, 2012; Tekin-Koru, 2017), as it provides a better coverage compared to other measures[1] (d’Agostino et al , 2016). We further follow the methodology used by Wu (2006) and Cuervo-Cazurra (2008), and rescale the corruption measure by subtracting it from 100 so that higher scores indicate higher levels of corruption.…”

“…To the best of the authors knowledge, the only work that is closely related to this research is of Tekin-Koru (2017), in which the author uses firm-level data to examine the effect of corruption on the likelihood of Swedish MNEs choosing a certain investment mode over the 1987-1998 period. In addition, two other studies that might provide some fundamental background on corruption-FDI type nexuses and that are related to this research in some sense are those of Meyer and Nguyen (2005) and Hakkala et al (2008).…”

“…Third, the model specifications are relatively insufficient in some cases. For example, although the study by Meyer and Nguyen (2005) and Tekin-Koru (2017) provide some formative background information, the authors did not control for the potential endogeneity bias. In fact, previous literature has demonstrated that the host country’s corruption level is not strictly exogenous and is influenced by many other factors such as geographic features (Goel and Nelson, 2010), political (Alt and Lassen, 2003) and cultural factors (Treisman, 2000).…”