Corruption and FDI in natural resources: The role of economic downturn and crises

• Published in: Economic modelling 2023-02, Vol.119, p.106122, Article 106122
• Main Authors: Cruz, Manuel David, Jha, Chandan Kumar, Kırşanlı, Fatih, Sedai, Ashish Kumar
• Format: Article
• Language: English
• Subjects: Corruption; Economic downturn; Fiscal crisis; Foreign direct investment; Natural resources; Sovereign debt
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2022.106122

This study adds to largely non-existent literature on corruption and foreign direct investment (FDI) in natural resources by examining the association between the two using a panel of 20 Latin American and Caribbean countries from 1995 to 2020. We find that higher levels of corruption are associated with lower levels of FDI in natural resources, supporting the “grabbing hand” or “sand-the-wheel” hypothesis. Further, we argue that during economic downturns and crises, corrupt agents are likely to use the prevalence of corruption to disregard laws to attract greater FDI in natural resources to compensate for the adversity brought about by hard times. Consistently, we find that while still detrimental to resource FDI, corruption's diminishing effects on resource FDI are much less pronounced during economic downturns and fiscal crises, with the latter measured by credit events leading to a reduction in the present value of the sovereign debt. •We examine the effects of corruption on FDI in natural resources in Latin American and Caribbean countries.•Higher levels of corruption are associated with lower FDI in natural resources, supporting the “grabbing hand hypothesis”.•Corruption allows politicians and bureaucrats to disregard rules to attract more resource FDI during difficult times.•During economic downturns and crises, positive effects of lower corruption on resource FDI are significantly diminished.•Results suggest that policymakers should pay greater attention to corruption during tough times.