| By: |
Pal, Sarmistha (University of Surrey) |
| Abstract: |
The present paper argues that the effect of corruption on foreign ownership is
not necessarily linear and depends on the level of host corruption. So long as
the expected returns from foreign investments exceed its expected costs,
higher host corruption will be associated with higher foreign ownership.
However, costs may exceed or exactly compensate the returns to foreign
investment at very high level of corruption, giving rise to negative or even
an insignificant relationship when positive and negative effects outweigh each
other. Further, we argue that this non-linear corruption effects may arise
from multinational firms' attempts to investing in countries with similar
environment and/or ensuring some formal networking with host countries in a
bid to limit the damages caused by high level of host corruption. Panel fixed
effects estimates (after correcting for foreign entry selection) using a
recent large home-host matched panel data from central and eastern European
host countries provide some support to these hypotheses: (i) higher corruption
is associated with significantly higher foreign ownership unless corruption is
at its fourth quartile value. (ii) There is also some confirmation that this
non-linear corruption effects is linked to parent firms' attempts to ensure
institutional similarity while investing in corrupt host countries: in
particular, foreign multinationals from EU/OECD home countries tend to hold
higher ownership in EU/OECD host countries and also when the home-host
relative corruption distance is small. |
| Keywords: |
corruption, relative corruption, EU/OECD home-host link, foreign ownership, joint venture vs sole subsidiaries, Central and Eastern Europe |
| JEL: |
F23 G32 L24 O17 P33 |
| Date: |
2013–09 |
| URL: |
http://d.repec.org/n?u=RePEc:iza:izadps:dp7636&r=ifn |