Impact of corruption on foreign direct investment and tax revenues

Using Transparency International’s Corruption Perceptions Index (CPI), this paper establishes a statistically significant link between CPI and foreign direct investment (FDI) flows to 54 developing and developed countries. In addition to each country’s CPI, several location and economic characterist...

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Bibliographic Details
Published in:Journal of public budgeting, accounting & financial management accounting & financial management, 2005-03, Vol.17 (3), p.313-341
Main Authors: Ketkar, Kusum W., Murtuza, Athar, Ketkar, Suhas L.
Format: Article
Language:English
Subjects:
Bribery
Corporate taxes
Correlation analysis
Corruption
Corruption in government
Developing countries
Economic development
Economic impact
Foreign investment
Industrialized nations
International
LDCs
Perceptions
Rates of return
Studies
Tax rates
Tax revenues
Taxable income
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Summary:Using Transparency International’s Corruption Perceptions Index (CPI), this paper establishes a statistically significant link between CPI and foreign direct investment (FDI) flows to 54 developing and developed countries. In addition to each country’s CPI, several location and economic characteristics are also postulated to influence FDI. For a group of 22 developing countries, the paper then simulates the impact of an improvement in the CPI score on FDI. This simulation shows that a one point improvement in CPI would generate on average additional FDI of 0.5% of GDP. For instance, the gain in annual FDI would be $7.5 billion for India and $18 billion for China. The paper further simulates the effects of larger FDI on the generation of taxable income and tax revenues in each country using country-specific rates of return on US investment and the highest marginal corporate tax rate in each country. This simulation shows that a three point improvement in CPI would more than double the corporate tax take on average with the biggest beneficiaries such as India, Turkey, Egypt, South Korea, the Philippines and Thailand.
ISSN:1096-3367
1945-1814
DOI:10.1108/JPBAFM-17-03-2005-B004