CORRUPTION, CULTURAL SIMILARITIES, AND GEOGRAPHIC DISTANCE AND THEIR IMPACT ON FOREIGN DIRECT INVESTMENT

Abstract

Foreign direct investment (FDI) plays an essential role in the growth of individual economies. Previous research has attempted to explain the wide
variance in the amount of FDI that different countries receive by examining such factors as a nation’s political stability, the long term economic
prospects, ease of doing business, and regulatory environment. This paper examines the impact on inward FDI of three factors that have been largely
ignored or only partially studied by previous literature: the level of a country’s corruption, its geographic distance from countries that have
traditionally been large sources of outward FDI, and a country’s sharing of cultural similarities with countries that tend to be large investors
abroad. This paper has analyzed data obtained from countries in all areas of the world and over a number of years in order to eliminate potential
biases due to exceptionally large investments or divestments that may distort the flow of FDI when a short period of time is studied. Overall, this
paper attempts to shed light on the reasons that certain countries receive large amounts of FDI while others do not. Our analysis shows that corruption
is the most important variable that determines the flow of inward FDI. These results have important implications for managers and policy makers that want
to improve the amount of inward FDI that a country receives.