Introduction
The problem of corruption is on-going right at this very minute and seems to be disturbing for everyone in the society. It is perceived to damage the investment environment of a country. However, little research has been commenced to empirically examine corruption’s impacts on foreign direct investments. Corruption on foreign direct investment in most countries has a huge impact on the distance measure of corruption between the host and source countries on cross-border direct investment. Corruption distance deters cross-border investment (1987). Research shows that there are evidences that indicate corruption distance to be not as serious a deterrent of outward direct investment from more-corrupt countries as it is from less-corrupt countries.
The Foreign Direct Investment
Understanding the connection between corruption and Foreign Direct Investment (FDI) ownership composition is important for several reasons. First, understanding the determinants of FDI ownership composition is important. For example, many developing and transition economies are eager to attract foreign investors for the advanced technologies that they may bring. The technological content of a foreign investment varies with the ownership composition of the investment. Second, host country corruption ought to play a more significant role in theories and empirics of international capital flows than it does so far. Cross-country variation in corruption levels is as large as the variations in labor cost or corporate tax rate, two commonly emphasized determinants of international direct investment. Third, given that corruption is elusive to measure but important conceptually, it is useful to derive and test more nuanced predictions of the economic consequences of corruption, such as its effect on the composition of FDI. This could help investors in increasing their confidence that popularly used measures of corruption are indeed meaningful and informative (2001).
Plight of Investors in a Foreign Country
Foreign investor’s choice of entry mode may be affected by the extent of corruption in a host country. Corruption makes dealing with government officials, for example, to obtain export licenses and production permits less transparent and more costly, particularly for foreign investors. In this case, having a local partner lowers the transaction cost (e.g., the cost of securing local permits). At the same time sharing ownership may lead to technology leakage. Both costs of local permits and losses from technology leakage are positively related to the extent of corruption in a host country. When corruption level is sufficiently high, no investment will take place. When corruption is low enough so that investment can take place, the foreign investor with more sophisticated technology prefers a wholly owned form, but, holding the technological level constant, the investor is more inclined to have a local partner in a more corrupt host country (2001).
In addition, there is an argument that it is impossible to get business done in large parts of the world without paying kickbacks to officials and it is also often argued that companies come under particular pressure to pay up, because they come from rich countries, and because they are outsiders. It is not clear whether further governance controls in the home jurisdictions is a solution. But what can be said is that anti-corruption actions under an existing regime would reinforce the cost side of the equation. Reduction of inward foreign investment only occurs in country with low level of corruption, but the rate of investment is actually higher in countries with a higher level of corruption.
Conclusion
Corruption is present in almost any country, but has the most devastating effects in developing economies, because it hinders any economic advance in the economic growth and democracy of a country. Normally, a foreign investor will have second doubts in investing to a particular country if the corruption level in there is unregulated and widespread. What the government will do to regulate corruption is clearly the key. The private sector is recognizing that it is in its own best interest to fight corruption to foster sustainable and stable business growth. Global business leaders are more publicly supportive of increased regulation to limit corruption. A careful assessment is needed of the capacity of government and international agencies to enforce, or private sector bodies to self-regulate these agreements, as well as the capacity of the range of companies to implement procedures to reduce corruption. Multinational businesses typically have the resources to train and monitor internally, but local firms, including down to the level of small and medium enterprises, will often require assistance to develop workable controls.Competent and visible anti-corruption bodies must implement anti-corruption laws. Targeted investigative techniques, statistics and indicators should be developed so that foreign investors would feel safe.
References
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