Thick as thieves? Corruption, institutional trust, and investment locations

Abstract

What makes corrupt investment locations still attractive to investing economies? This article examines whether states’ tendency to ignore corruption in investment targets is due to their being accustomed to corruption at home, or is instead due to a perception that despite flaws institutions can be counted on to remain functional. We argue that economies where corruption is viewed permissively would still likely invest in states equally perceived as corrupt but not necessarily due to shared collective tolerance. Rather, a perception of institutional dependability motivates the selection of investment locations, regardless of how people in investing states view corruption. To test our conjecture, we analyzed bilateral foreign direct investment outflows for 96 countries between 2001 and 2012 using exponential random graph models alongside value-based typologies for corruption and institutional confidence. Our results suggest that, overall, it is trust in institutions and not necessarily trepidation about corruption that mediates the selection of investment locations.