Corruption distance and FDI flows into Latin America

•In this study we analysed how corruption distance affects FDI.•Firms based on corrupt countries have internalised knowledge of how to deal with corruption.•MNEs should acquire and internalise how to deal with weak institutional environments abroad.•Firms based on corrupt countries are not affected...

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Bibliographic Details
Published in:International business review 2015-02, Vol.24 (1), p.33-42
Main Authors: Godinez, Jose R., Liu, Ling
Format: Article
Language:English
Subjects:
Corruption
Corruption distance
Economic analysis
Economic behaviour
FDI
Foreign direct investment
Institutions
International investment
Latin America
OLI theory
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Summary:•In this study we analysed how corruption distance affects FDI.•Firms based on corrupt countries have internalised knowledge of how to deal with corruption.•MNEs should acquire and internalise how to deal with weak institutional environments abroad.•Firms based on corrupt countries are not affected by corruption when investing abroad. Studies of corruption and its relationship with foreign direct investment (FDI) have yielded mixed results; some have found that corruption deters FDI but others have found the opposite. This paper replicates earlier studies within the OLI paradigm, but also seeks to advance our understanding of this relationship by introducing the concept of “corruption distance” between pairs of countries and applying it to the special context of Latin America. After controlling for transaction costs and institutional variables, results show that corruption distance has an asymmetrical impact on FDI. Host countries with “positive” corruption distance compared to the corruption levels of home countries, experience no significant increases or reductions in levels of inward FDI. However, “negative” corruption distance suffered by host countries is associated with significantly lower levels of inward FDI. We argue that firms from a home country with relatively low levels of corruption are unfamiliar with the formal and informal institutions associated with corruption. Conversely, firms from home countries with high corruption are undeterred by high corruption in host countries. Thus, corruption distance can be seen as a key determinant of FDI when investing in a highly corrupt host location.
ISSN:0969-5931
1873-6149
DOI:10.1016/j.ibusrev.2014.05.006