Corruption and its Effect on Foreign Direct Investment in the Energy Sector of Emerging and Developing Economies

Abstract

Purpose – The paper addresses the MNCs’ sensitivity to corruption which varies across economic sectors depending on the interaction between sectoral characteristics and home-country formal institutions’ strength.

Design/methodology/approach – A theoretical framework is proposed based on the economic sector and host-country's institutional factors. The framework is empirically tested using 245 cross-border FDI valuations. Given that the energy sector is representative of high levels of industry concentration and government involvement – the sectoral characteristics considered to be moderating the relationship between corruption and FDI – the focus of the paper is on the energy sector. The study also tests the moderating effect of corruption distance.

Findings – The results indicate a lack of evidence that MNCs are deterred by corruption when investing in the energy sector of emerging and developing economies.

Research limitations/implications – The study provides a starting-point for further research of how economic sector characteristics can moderate the relationship between corruption and FDI. A key practical implication is that international anti-corruption measures are likely to be insufficient for some economic sectors.

Originality/value – The paper has proven to be of interest to the US State Department for studying the effectiveness of the international foreign bribery laws, such as the Foreign Corrupt Practices Act. The framework can assist in identifying economic sectors likely to be resistant to comply with the foreign bribery laws when conditions of weak host-country formal institutions are present. The study challenges and complements the prevailing theory that host-country corruption has a negative effect on inward FDI.

Citation

Kouneva-Loewenthal, N. and Vojvodic, G. (2012), "Corruption and its Effect on Foreign Direct Investment in the Energy Sector of Emerging and Developing Economies", Van Tulder, R., Verbeke, A. and Voinea, L. (Ed.) New Policy Challenges for European Multinationals (Progress in International Business Research, Vol. 7), Emerald Group Publishing Limited, Leeds, pp. 339-363. https://doi.org/10.1108/S1745-8862(2012)0000007017