The Effect of Home Country and Host Country Corruption on Foreign Direct Investment

We analyse the effect of corruption on FDI. Using FDI outflows from a sample of East European transition economies that had virtually no outward FDI before 1995, we observe FDI flows based mainly on current investment decisions and less on the inertia of past investments. Our model separates the effects of corruption on FDI location decisions and on the amount invested. We find a linear and negative relationship between host country corruption and the likelihood of MNCs locating in that country. The relationship between home country corruption and FDI is non-monotonic, with an inverse U shape where both high and low levels of corruption in the home country reducing the probability of outward FDI flows. If FDI is undertaken to a host country, the volume of FDI is affected by home-country but not by host-country corruption