As a major driver of economic development, foreign direct investment (FDI) has been examined from different lenses. This study aims to investigate how the perception of bribery in target markets by foreign investors shapes their investment behavior depending on the level of corruption in their home country.
The authors develop a framework with distinctions between low and highly corrupt countries to evaluate their responses to clean and corrupt environments abroad when making foreign investments. A dynamic gravity model with panel data analyses on 36 economic cooperation and development members over the 2013–2018 period is used to test the hypotheses.
The authors find that low-corruption sources of investment are deterred by widespread bribery in foreign markets and tend to commit more resources to transparent environments. However, highly corrupt countries invest more in high-corruption target markets.
The literature is dominated by two views arguing that inward FDI is deterred by corruption in the host country, and corruption differences between home and host markets. The authors shift the focus from recipient countries to investors’ perspective with various configurations of bilateral outward FDI between home and host countries based on their level of corruption.
