The MNC as an Agent of Change for Host-Country Institutions: FDI and Corruption

Most empirical research examines how the institutional environment of corruption shapes the behavior of MNCs. In this study, we would like to highlight the other side of the picture: how the presence of MNC may shape the institutional environment of corruption over time. We propose three avenues through which the MNC may have an impact on its host institutions: the regulatory pressure effect, the demonstration effect, and the professionalization effect. Based on extensive data on FDI and corruption for a large sample of countries over the last 30 years, the empirical results are consistent with our general hypothesis that foreign direct investment generates positive spillover effects on the institutional environment of host countries. Such findings provide a glimmer of hope for the future of the host country where corruption is most prevalent.