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How Does Corruption Influence the Effect of Foreign Direct Investment on Economic Growth?

Okada, Keisuke and Samreth, Sovannroeun (2010): How Does Corruption Influence the Effect of Foreign Direct Investment on Economic Growth?

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Abstract

We investigate the effect of Foreign Direct Investment (FDI) on economic growth by employing the data of 132 countries for the period from 1995 to 2008, considering the role of corruption in each country as an absorptive factor. The estimation results indicate that, although FDI alone does not promote economic growth, it has a significant effect on economic growth if the interaction term between FDI and corruption is considered. The threshold level of corruption separating the negative and positive effects of FDI on economic growth is approximately in the 10th percentile from the least corrupt countries. The existence of a corruption threshold implies a counter-intuitive proposition: that FDI inhibits economic growth in countries where corruption is below a corruption threshold, and promotes economic growth in countries where corruption is above the threshold. Our results are robust even if we use different corruption indices and conduct the instrumental variable estimation to address endogeneity problems.

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