How do institutions facilitate the relationship between corruption and FDI?
Date
2022
Authors
Lakha, Bianca
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Abstract
Qualitative research on the institutional environment, corruption, and FDI highlights an important facilitating relationship between these factors. Subsequently providing more conclusive results than prior research which saw the institutional framework as a black-box. Theoretical research conducted in prior years found that variables proxying the institutional environment facilitate the relationship between corruption and FDI. The facilitating relationship is such that it suggests the existence of a threshold effect. This, combined with the competing views in corruption-FDI literature – also known as the helping- and grabbinghand hypotheses – provides an intriguing and novel area of research. Namely, investigating the existence of a threshold value at which the relationship between corruption and FDI changes from grabbing- to helping-hand and vice versa, giving insight into the mixed results in the literature so far. This study, through the use of dynamic panel threshold estimation, fills a gap in the literature by providing empirical evidence for the existence of significant threshold effects which explain the facilitating nature of various institutions – political stability, government effectiveness, rule of law and regulatory quality – on the corruptionFDI relationship. It is the first of its kind to use panel threshold analysis to investigate threshold effects on a sample of African countries. Using data on 34 African countries over the 2005 to 2019 period, the results of this study indicate that in an environment proxying the institutional framework of a country, significant threshold effects of institutions do exist. Subsequently, showing at exactly what level the relationship between corruption and FDI changes from having a helping- to a grabbing-hand effect and vice versa. In addition, the results indicate differences in the way political and economic institutions mediate the corruption-FDI relationship.
Description
A Research Report submitted in partial fulfilment of the Degree of Master of Commerce (Economic Science) in the School of Economics and Finance,
University of the Witwatersrand, 2022