Corruption, Anti-corruption And Foreign Direct Investment

Corruption, claims to be the “cancer of economy”. All nationalities, countries and regions over the world, no matter rich or poor, big or small, are likely to be penetrated with it. Even in developed countries, such as the United States, it is also very corrupt in history. That is to say, corruption is a worldwide social and historical phenomenon. For corruption, CPC leaders have taken corresponding actions to anti it. Especially after the eighteenth national congress of CPC, the unprecedented efforts to fight corruption are famous as “both tigers and flies”.There is no doubt that corruption and anti-corruption may produce a series of far-reaching influence on the development of social economy. And, how will they affect foreign direct investment(FDI)? Especially the current tide of anti-corruption.Based on this background, we push forward our topic.According to existing literature, we can find that the contributions of this paper are mainly embodied in two aspects: 1, By analyzing the influence of corruption on FDI from the absolute level of corruption and relative level of corruption(corruption-gap), we find that there is an inverse U shape relationship between China’s corruption and foreign direct investment. 2, Investigate the influence of corruption on FDI, put forward and test the hypothesis——Anti-corruption has an U shape effect on FDI. We also pay attention to the nonlinear(non-monotonic)influence which is different from previous literature.To the best of our knowledge, this is the first paper discusses the impact of corruption-gap on foreign direct investment about China, the second one focus on the effects of anti-corruption on China’s FDI in Chinese literature. It’s easy to expect our research will enrich the literature of foreign direct investment.The main contents of this dissertation can be divided into following sections:First, measure China’s corruption level and anti-corruption efforts, and briefly introduces the basic situation of China’s foreign direct investment. These contents will be dispersed into the relevant sections as empirical research background.Second, discuss the influence of corruption, anti-corruption on foreign direct investment from theory to logic, and put forward relevant assumptions. In terms ofintuition, the influence of them on FDI may varies along with the development stage,capital source, firm and industry characters, etc.Third, empirical analyze the influence of corruption, anti-corruption on foreign direct investment. We mainly adopts the World Bank Global Governance Index(WGI) and the Political Risk Services Group(PRS) component index to measure the corruption level. We first use China’s 1984-2013 time series data to survey its influence on FDI at absolute level. And then, using 2000-2013’s panel data to survey the relationship between the relative corruption and FDI. By reference China’s corruption level, we divide 122 economies into “relatively clean group”, “relative corruption group” and “Confucian culture group”. For anti-corruption, we mainly base on China’s 1998-2013 provincial panel data to test the “U shape” hypothesis.Through the mechanism study and empirical analysis, the main conclusions of this paper are listed as follows:First, in the early stages of economic development or in a state of low corruption level, the existence of corruption can improve transaction efficiency to a certain extent, and promote the foreign direct investment inflows. When the economic and social development to a high level, the calls for fair and transparent business environment will become strong. At that time, corruption is not conducive to attract foreign direct investment. This suggests that corruption is not only the“sand”, but also the “lubricant”, it plays a dual role. In general, the effects of absolute corruption on FDI comply with an inverse U-shape trajectory.Second, corruption-gap has an asymmetry negative influence on foreign direct investment. Specifically, the relative clean economies are significant around 10%level, the relative corruption countries and regions are significant at 1% level, and the Confucian cultural economies only show a negative relationship, not significant.These differences indicate the different national character determines their different reactions to the same factors.Third, from the capital source view, for clean economies, China reduce corruption levels(i.e. intensify anti-corruption) is conducive to attract direct investment from these countries and regions. For high corruption economies, theexistence of corruption is likely to attract direct investment from these economies.That is to say, their policy implications are opposite. But in terms of long-term net effect, in order to attract more FDI, we should convergence our corruption level to clean economies.Namely, through anti-corruption to attract more foreign investment.Fourth, the influence of anti-corruption on FDI shows the characteristics of U in geometry. It means that the increase of FDI and the enhancement of anti-corruption are not synchronized, foreign business has a reaction time for China’s anti-corruption.This means that in the initial stage, the anti-corruption is likely to reduce FDI. Of course, this kind of periodic or temporary reduce does not necessarily reflect on investment volume, are more likely to reflect on the investment growth. On the right side of the U shape curve, as the anti-corruption continue to push forward, the investment and business environment improve, investors’ positive expectations for anti-corruption will become stabilize.Fifth, from the point of control variables, the improvement of economic cluster,the ascension of human capital, the improvement in infrastructure conditions,currency appreciation under the direct quotation, strengthen the policy support and economic growth can promote foreign direct investment inflows. The political environment difference shows a positive relation to FDI, indicate that foreign investors are dare to carry out investment activities in different political environments. Our estimation results also show that the wages are positively related to FDI. Its mechanism may be that, under the condition of constant labor supply and demand, wage-rising is the signal of high labor quality, and high wages often represent the large market size and consumption level.For negative effects, our studies show that cultural differences, control of the economy and the geographic distance could distort foreign direct investment inflows.In addition, the relative economic size and relative population size are positively related to the foreign direct investment, they have a gravitational pull. Certainly,different corruption levels have different effect. For direct investment from clean economies and Confucian culture, the relative economic size has a negative impact,and the relative population size plays a promote role. The situation of relative corruption group is just reverse.Integrate our research, we can see the current literature about the relationship between corruption, anti-corruption and foreign direct investment are controversial.The reason may be that most studies explore the relationship of them just from absolute levels alone, or just examine their linear relationship, and ignore the possible nonlinear relationship. Our work can close dispute to some extent and promote the related research.The policy implications as follows: China needs anti-corruption. We should pay more attention to institutional construction, stabilize and adjust market expectations during the process of anti-corruption. To attract more foreign capital, we should continue to improve the level of human capital, infrastructure, and intensify policy support. At the same time, we also needs to reduce the control of economy, let market play a fundamental role in the allocation of resources.Admittedly, this article also exist some regrets(shortcomings). Data limitations make us can only engage in national time series about the influence of absolute corruption on FDI, that leads conclusion a little rough. When to explore the influence of anti-corruption, we fail to explore its influence in firm level and industry level,and couldn’t isolate the influence of key corruption cases from general corruption cases. Besides, compared with the general corruption case, investigation of major,key corruption cases’ impact will be more significant. But, the information reported by the Procuratorial Yearbook of China and Law Yearbook of China are lack seriously. If we have related data, our research could be more in-depth.Further study could focus on the following points: the measures of corruption,anti-corruption and database construction; corruption gap and foreign direct investment; anti-corruption and foreign direct investment. Particularly, we should focus on the profound social and economic impacts brought by China’s anti-corruption practice, and pay more attention to its non-linear influence.