Corruption and Foreign Direct Investment: A Conceptual Review
Keywords:FDI, Corruption, Developing Economies, Institutional Environment
This paper carefully reviews the empirical literature on the relationship of corruption and FDI inflow from 2000 to 2019 with a focus on more recent studies. Though corruption is not a new phenomenon, its pervasiveness in the contemporary era, as well as its role in modern economy, has continued to attract the interest of scholars and development institutions in recent times. Theoretically, there are two conflicting views on corruption. The “grabbing hand” hypothesis maintains that corruption raises the cost of transactions, risks and uncertainties which inhibits FDI inflow, while the “helping hand” hypothesis believes that corruption eases bureaucratic as well as regulatory hurdles and greases the wheels of commerce, thereby facilitating the inflow of FDI. Although the methodologies employed and the context of the various empirical investigations reviewed differ considerably, the paper has largely shown that there is no consensus on the nature of corruption-FDI nexus. While the outcomes of the studies are dominated by the validation of the “grabbing hand” hypothesis, some have supported the grease the view of the wheel, whereas few concluded on insignificant relationships between corruption and FDI inflow. These contradictory outcomes from various studies have prompted some scholars to examine the connection between some specific aspects of FDI with corruption in a more dynamic framework. Accordingly, the areas of concern from the review have been pointed out in the discussion of the findings. The paper has also documented the need for further studies in this area with relevant suggestions.
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