The Effect of Corruption Perception on Foreign Direct Investment

Abstract

Economists have been studying the effects of corruption on a variety of economic variables, like growth, inequality and innovation. This chapter investigates the impact of Transparency International's Corruption Perception Index (CPI) on the inflows of Foreign Direct Investment to Latin American Countries for the period 2012-2019. The choice of the period is due to the new methodology of the CPI which allows for comparisons between time periods. A panel data model is employed to investigate whether corruption “grease the wheels” or “sand the wheels” of FDI. Results show that the CPI exerts no influence on the inflows of FDI, at least for this time period and sample. The chapter also considered the criticism raised by Heywood (2017), who criticizes the very use of measures of perception of corruption as valid parameters to analyze the role of corruption on economic outcomes.