Does Corruption Drive Foreign Direct Investment? Insight From Developing Economies

The impact of corruption on foreign direct investment (FDI) remains unsettled in the empirical literature. Using a panel dataset of 112 developing countries over the period 1980–2022, we examine the effects of corruption across different institutional dimensions, namely the executive, legislative and judicial branches, as well as the media and the public sector. Our results reveal a differentiated impact of corruption on FDI depending on its institutional source. The 2SLS estimates indicate that public sector corruption, executive corruption and overall political corruption significantly reduce FDI inflows, whereas legislative, judicial and media corruption are associated with higher FDI. The IV-QR results confirm these patterns and further show that the negative effects of public sector, executive and political corruption weaken at higher quantiles of the FDI distribution. By contrast, the positive effects of legislative, judicial and media corruption also decline along the distribution. These findings call for policy measures to address the high prevalence of corruption and bureaucratic rigidities faced by multinational companies operating in developing countries.