Who Cares about Corruption?

Author(s): Alvaro Cuervo-Cazurra

Reviewed work(s):
Source: Journal of International Business Studies, Vol. 37, No. 6, Three Lenses on the
Multinational Enterprise: Politics, Corruption and Corporate Social Responsibility (Nov., 2006),
pp. 807-822
Published by: Palgrave Macmillan Journals
Stable URL: http://www.jstor.org/stable/4540385 .
Accessed: 25/06/2012 12:50

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .
http://www.jstor.org/page/info/about/policies/terms.jsp

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.

Palgrave Macmillan Journals is collaborating with JSTOR to digitize, preserve and extend access to Journal of
International Business Studies.

http://www.jstor.org
 Business
of International
Journal (2006)37,807-822
Studies
© 2006 AcademyofInternationalBusiness Allrightsreserved0047-2506
www.jibs.net

Who cares about corruption?

AlvaroCuervo-Cazurra
of South
MooreSchoolof Business,University
Carolina,Columbia,SouthCarolina,USA
Correspondence:A Cuervo-Cazurra,Sonoco
InternationalBusiness Department, Moore
School of Business, Universityof South
Carolina,1705 College Street, Columbia,
SC 29208, USA.
Tel: +1 803 777 0314;
Fax: + 1 803 777 3609;
E-mail:acuervo@moore.sc.edu
Abstract
This paper examines the impact of corruptionon foreign direct investment
(FDI).Itarguesthat corruptionresultsnot only in a reductionin FDI,but also in
a change in the composition of country of origin of FDI.It presentstwo key
findings.First,corruptionresultsin relativelylowerFDIfromcountriesthat have
signed the Organization for Economic Cooperation and Development
Conventionon Combating Briberyof ForeignPublicOfficialsin International
BusinessTransactions.Thissuggests that lawsagainstbriberyabroadmay act as
a deterrent against engaging in corruption in foreign countries. Second,
corruptionresults in relativelyhigher FDIfrom countrieswith high levels of
corruption.Thissuggests that investorswho have been exposed to briberyat
home may not be deterred by corruptionabroad, but instead seek countries
where corruptionis prevalent.
BusinessStudies(2006) 37, 807-822.
Journalof International
doi:10.1057/palgrave.jibs.8400223

Keywords:corruption; international
foreigndirectinvestment; management

Received: 24 August 2005
Revised: 15 April2006
Accepted: 17 April2006
Online publication date: 14 September 2006
Introduction
Host country corruption discourages foreign direct investment
(FDI). Corruption, the abuse of public power for private gain,
creates uncertainty regarding the costs of operation in the country.
It acts as an irregular tax on business, increasing costs, and
distorting incentives to invest (Shleifer and Vishny, 1993; Mauro,
1995; Wei, 2000a) Many empirical studies provide support for this
idea, as they find that corruption in the host country is negatively
related to FDI (e.g., Wei, 2000a, b; Habib and Zurawicki, 2002;
Lambsdorff,2003).
However, some scholars have argued that corruption can have a
positive impact on investment by facilitating transactions in
countries with excessive regulation (Huntington, 1968; Leff,
1989). Investors who greatly value their access to a certain asset,
for example a permit, will pay for this access (Lui, 1985). Some
empirical studies do not find a negative relationship between
corruption and FDI, and some even report a positive relationship
(e.g., Wheeler and Mody, 1992; Henisz, 2000). Moreover, some
countries with high levels of corruption, such as China or Nigeria,
are the recipients of a great deal of FDI. Corruption does not keep
FDIout of very corrupt countries. This fact begs the question of just
how corruption affects FDI.
In this paper, we argue that corruption results not only in a
reduction in FDI, but also in a change in the composition of
country of origin of FDI. We suggest that not all foreign investors
care about corruption in the host country. Although corruption has
a negative impact on FDI because of the additional uncertainty and
 Who cares about corruption?
808
costs, such costs vary depending on the country of
origin of the FDI.We discuss two such cases: (1) FDI
from countries that have signed the Organization
for Economic Cooperation and Development
(OECD) Convention on Combating Bribery of
Foreign Public Officials in International Business
Transactions and (2) FDI from countries with high
levels of corruption. We analyze the impact of
corruption on FDI from these two sets of countries
in comparison with FDI from a third set of
countries: those that have low levels of corruption
and have not signed the OECD Convention.
Our results show that the relationship between
corruption and FDI is modified by the country of
origin of the FDI. Corruption in the host country
results in relatively less FDI from countries that
have signed the OECD Convention, but in rela-
tively more FDI from countries with high levels of
corruption. The outcome of these two effects is that
countries with high corruption receive less FDI
from countries with laws against bribery abroad,
which are the largest sources of FDI, and more FDI
from other countries with high corruption levels.
Two views of corruption
Corruption refersto the exercise of public power for
private gain. We focus on public corruption or
corruption in government, whereby a public
employee, elected or not, uses his or her position
in government in order to obtain private benefits.
The existence of corruption indicates a lack of
respect for the rules and regulations that govern
economic interactions in a given society. It repre-
sents the need to make additional, irregular
payments to get things done (Kaufmann et al.,
2003).
There are incentives for corruption whenever an
official has discretion over the distribution of a
good or the 'avoidance of a bad' to the private
sector (Rose-Ackerman, 1999). The official has an
incentive to ask for a bribe to increase his or her
income in exchange for a good that has little cost to
him or her (Shleifer and Vishny, 1993). The firm has
an incentive to offer a bribe and obtain benefits to
which it would not otherwise have access, such as
being granted a contract without competitive
tender.
There are two views of corruption, one positive
and the other negative. Although corruption is
rarely justified on ethical grounds, some scholars
view corruption in positive terms as 'grease in the
wheels of commerce'. Corruption is seen as facil-
itating transactions and speeding up procedures
Journal of International Business Studies
AlvaroCuervo-Cazurra
that would otherwise occur with more difficulty, if
at all (Huntington, 1968; Leff, 1989). Corruption is
a way to bring market procedures into an environ-
ment of excessive or misguided regulation, intro-
ducing competition into what is otherwise a
monopolistic setting (Leff, 1989). Corruption
enables free markets to emerge in situations of
limited freedom. Investors who value time or access
to an input more than others will pay more for it
(Lui, 1985).
However, many scholars have a negative view of
corruption, because it is rarely restricted to areas
where it may increase welfare. These scholars see
corruption as 'sand in the wheels of commerce',
indicating that corruption results in the wasteful
use of resources devoted to corruption as well as to
fighting it. These resources could be invested more
profitably in other ways (Kaufmann, 1997). More-
over, the payment of a bribe does not ensure that
the promised goods are delivered. Investors do not
have recourse in the courts to demand fulfillment
of the agreement, as bribery is illegal. Even when
the bribe results in fulfillment of the promise, the
firm faces increased costs (Shleifer and Vishny,
1993). The official can withhold approval of a
permit until a bribe is paid, thus increasing the cost
to the firm. Moreover, government officials have an
incentive to create additional regulations with the
sole purpose of generating an opportunity for more
bribes (De Soto, 1989). Corruption also results in
the inefficient allocation of resources towards areas
that are more prone to bribe payment (Mauro,
1998).
Impact of host-country corruption on FDI
A great deal of researchon the relationship between
host-country corruption and FDI has found a
negative relationship between the two. Mauro's
(1995) analysis of the institutional characteristicsof
67 countries found that corruption reduced overall
investment in the country. Wei (2000a) analyzed
bilateral FDI from 12 developed countries to 45
destination countries and found that corruption
had a negative impact on FDI. Wei (2000b)
confirmed the negative relationship between cor-
ruption in the host country and FDI after taking
into account government policies towards FDI.
Smarzynskaand Wei (2000) found that corruption
had a negative impact on foreign investment in 22
Eastern European countries. Habib and Zurawicki
(2002) analyzed bilateral FDI flows from seven
developed countries to 89 countries and found that
both the level of corruption in the host country and
 Who cares about corruption?
the absolute difference between the level of corrup-
tion in the host country and in the home country
had a negative impact on FDI.Voyer and Beamish's
(2004) analysis of Japanese FDI found that corrup-
tion had a negative impact on FDI per capita,
especially in developing nations.
However, not all empirical studies have observed
a negative relationship. For example, Wheeler and
Mody (1992) found no relationship between risk,
which includes corruption, and foreign investment
by US firms. Hines (1995) analyzed US FDI, and his
results showed that corruption in the host country
did not affect the level of total inward FDI,
although it had a negative impact on the growth
of FDI after the passage of the Foreign Corrupt
Practices Act (FCPA)of 1977. Henisz (2000) found
that, for US firms, corruption tends not to affect
their investments, and in some cases it increases
the probability of investing in the foreign country.
Variationon the sensitivityof FDIto host-country
corruption
We argue that not all investors are equal. The
sensitivity of FDI to host-country corruption is
likely to vary with the country of origin of the FDI.
This line of thinking has yet to be thoroughly
explored in the literature. Below we discuss how the
characteristics of the country of origin of FDI
influence the cost of engaging, and incentives to
engage, in bribery and, as a result, the sensitivity of
FDI to host-country corruption. Figure 1 illustrates
the relationships among the key constructs. We
discuss two characteristics of the home country
that affect this sensitivity: the existence of laws
against bribery abroad, and the existence of high
levels of corruption.
Sensitivityof FDIfrom countrieswith laws against
briberyabroad to host-countrycorruption
Some countries have implemented laws against
bribery abroad in order to limit the supply of bribes
Home countrywith
laws againstbribery
abroad
Hypothesis
1I
Host country DI
corruption
Hypothesis2
Home countrywith
high corruption
Figure 1 Theoreticalframework.
AlvaroCuervo-Cazurra
809
by foreign investors. Such legislation is likely to
increase the cost of engaging in bribery abroad for
investors from these countries. The benefits of
paying a bribe to a foreign official may not be
worth the cost when the foreign investor takes into
account not only the cost of the bribe but also the
cost of the penalties, and the cost of the damage to
its image. Such a cost may alter the investor's
perception that it is appropriate to bribe foreign
officials to secure contracts. At the same time,
managers can use the existence of such legislation
as a signal that their hands are tied, reducing the
demand for bribes from foreign officials (Elliot,
1997: 205). As a result, these investors may reduce
their FDI into countries with high corruption,
although they may not avoid these countries
altogether.
The first country to have such laws was the US. In
an effort to clean up the image of US firms and their
use of bribery, the FCPAwas passed in 1977. This
law requires strict accountability of payments,
making it possible to prosecute US firms and
individuals for bribing government officials abroad
(Kaikati and Label, 1980; Hines, 1995). The FCPA
established three main requisites: accurate record-
keeping; effective internal accounting control sys-
tems; and prohibition of corrupt payment to
foreign officials, politicians, and political candi-
dates. The Act provides for penalties of up to US$1
million for a firm, and a US$10,000 fine as well as a
5-year prison term for an employee (US Congress,
1977). It made illegal not only direct payments to
foreign officials or politicians, but also payments to
other individuals - facilitating agents - who bribe
on the firm's behalf. However, the FCPA was
explicit in not penalizing 'grease payments', or
payments to foreign officials to expedite processes
that would otherwise occur without a bribe, albeit
more slowly.
It is not clear that the FCPAhas been effective in
deterring US investments in corrupt countries.
Hines (1995) found support for this deterrence
effect, as US firms reduced the growth of invest-
ments in FDI, capital-labor ratios, joint venture
activity, and aircraft exports to countries with high
corruption after the passage of the Act. However,
Wei (2000a) found no such support: his data
suggested that US investors did not have lower
FDI stocks in corrupt countries than investors from
other developed countries; all of them were
negatively affected by corruption in the same way.
There are two possible explanations for these
conflicting results (Tanzi, 1998). One is that US
Journal of International Business Studies
 Who cares about corruption?
810
investors had an incentive to bypass the FCPAto
avoid losing competitiveness in the allocation of
contracts abroad to competitors from other foreign
countries. Another is that the US government was
not forceful in prosecuting bribery abroad, espe-
cially in 'friendly' countries. This changed in the
mid-1990s thanks to the convergence of several
trends (Tanzi, 1998). First, the end of the Cold War
reduced the need to turn a blind eye to corruption
in friendly countries. Second, the spread of democ-
racy and freedom of the press exposed bribery that
used to be hidden, especially in centralized econo-
mies. Third, non-governmental institutions, such
as Transparency International, took an active role
in denouncing corruption. Fourth, international
institutions, such as the World Bank and Interna-
tional Monetary Fund, started demanding better
governance in development projects. Finally, inter-
national organizations, such as the OECD, took an
active role in promoting the reduction of bribery.
We explore this last point in more detail.
On 21 November 1997 the 30 members of the
OECD,and an additional five non-members, signed
the Convention on Combating Bribery of Foreign
Public Officials in International Business Transac-
tions. The Convention, which came into effect on
15 February1999, established a general framework
that criminalizes bribery of foreign officials to
provide the firm with an improper advantage
(OECD, 1997). The Convention prohibits bribing
not only of government officials but also of officials
of public international organizations. It requires
signatory countries to modify their laws to make
illegal the bribery of foreign officials, to provide
mutual legal assistance in investigations, and to
allow for extraditions. Additionally, the Conven-
tion requires stricter accounting standards, external
auditing, and internal controls in national laws. A
companion agreement disqualifies bribes from
being tax-deductible business expenses (OECD,
1996). The Convention establishes a systematic
mechanism for monitoring of the implementation
of the Convention's standards by each signatory
country. The OECD'sWorking Group on Briberyin
International Business Transactions periodically
evaluates and publicizes progress made in the
adaptation of national laws towards the standards
set by the Convention and in the enforcement of
such laws. This mutual monitoring mechanism
addresses some of the limitations of the FCPA.It
establishes the same ethical requirements of con-
duct for all foreign investors, thus leveling the
playing field among competitors and reducing
Journalof InternationalBusinessStudies
Alvaro
Cuervo-Cazurra
incentives to bypass the legislation. Additionally,
the periodic evaluation of the progress in the
application of the Convention may create social
sanctions that improve enforcement. Governments
that do not make adequate progress towards the
prosecution of corruption may be pressured by
governments that fulfill their obligations.
Therefore we argue that corruption may further
discourage FDIfrom countries that have signed the
OECD Convention and have developed laws
against bribery abroad. The Convention increases
not only the potential costs of bribing foreign
officials by creating penalties, but also the effective
costs by increasing the probability of detection
through the mutual monitoring mechanism. Such
an increase in costs may alter the incentives to
invest in countries with corruption where investors
will be asked for bribes. Therefore we hypothesize
that:
Hypothesis 1: In comparison with FDI from
other countries, the relationship between host-
country corruption and FDI is negative for FDI
from countries with laws against bribery abroad.
Sensitivityof FDIfrom countrieswith high
corruptionto host-countrycorruption
Some FDI comes from countries with high levels of
corruption. These investors operate in countries
where the payment of bribes is a normal way of
doing business. As a result, they are likely to have
developed experience on how best to engage in
bribery to be able to operate in their home country.
Thus, when these investors internationalize, they
may not be deterred by host-country corruption,
unlike other investors, and they may even be
attracted by it for two reasons. First, they would
face lower costs of doing business abroad than
dealing with corruption in the host country
represents. Second, they may even select countries
with high levels of corruption because of the
similarities in institutional conditions to their
country of origin.
Internationalization requires dealing with addi-
tional costs of doing business abroad (Hymer, 1976)
or a liability of foreignness (Zaheer, 1995). Some of
these costs involve dealing with corruption in the
host country (Calhoun, 2002). We can distinguish
two sets of such costs: the costs of changing
attitudes regarding the use of bribes abroad, and
the costs of knowing how to bribe abroad. First,
corruption requires managers to alter their assump-
tions regarding the way in which one establishes
 Who cares about corruption?
and maintains business transactions. Managers
must change their belief in contracts and the
rule of law as the accepted way and instead
accept illegal payments as the way to conduct
business abroad. However, it is difficult to change
such deep-seated attitudes and beliefs about the
ways in which business is conducted (Prahaladand
Bettis, 1986), particularly when the firm expands
abroad (e.g., Johanson and Vahlne, 1977; Eriksson
et al., 1997).
Second, it is costly to develop expertise on how to
best deal with bribery in the host country because
there are no visible guides or consulting firms that
can provide knowledge about how to bribe success-
fully; its illegal nature precludes such services.
Engaging in corruption requires an understanding
of the subtleties involved in offering a bribe owing
to the illegal nature of the offer; simply offering a
bribe, not just the payment thereof, is a criminal
offence. In addition to being illegal, corruption is
opaque: it requires secrecy to be effective (Shleifer
and Vishny, 1993). Thus, engaging in bribery
requires an understanding of the subtleties
involved in payment of bribes in the host country.
In some cases, it may be difficult to separate the
cultural norms of gift exchange from bribery
(Donaldson, 1996).
A company may use joint ventures or managers
with experience in bribery to deal with the
payment of bribes abroad. These actions would
reduce the costs of learning how to bribe in the
country. However, the firm will still, and first, have
to incur the cost of changing the assumptions of
managers at headquarters about corruption, and
accept bribery as a valid way of doing business.
Additionally, the firm will have to incur the
additional costs of finding and monitoring the
local partner or manager so that they do not extract
rents from the company while they bribe others.
In contrast, those investors who have experi-
enced corruption at home are likely to have already
altered their beliefs about bribery as an accepted
way of doing business and to have mastered the
subtleties of how to deal with bribery. As a result,
when they enter other countries with high levels of
corruption, the costs of engaging in bribery are
lower. For firms whose managers have already
learned through experience, the cost of internatio-
nalization is lower (Eriksson et al., 1997). These
investors are accustomed to paying bribes in order
to secure permits and win contracts at home (Ades
and Di Tella, 1997): thus they may be undeterred by
the illegality, opacity and uncertainty in the bribery
Alvaro
Cuervo-Cazurra
811
process, because they are likely to already know
how best to deal with it.
FDIfrom countries with high corruption may not
only be undeterred by host-country corruption, but
may even be attracted by it. Investors from
countries with high corruption face lower costs of
doing business abroad when they enter other
countries with high corruption. The similarities in
the conditions of the institutional environment
induce these investors to focus their FDIthere. This
argument builds on the ideas discussed in the
incremental internationalization process or
Uppsala model (Johanson and Wiedersheim-Paul,
1975; Johanson and Vahlne, 1977). This model
explains the selection of countries in which to
internationalize based on the concept of 'psychic
distance' between the home and host countries
(Johanson and Wiedersheim-Paul, 1975). Psychic
distance is the difference between countries in
terms of language, culture, education, business
practices, industrial development, and regulations,
all of which may limit the transfer of information.
This distance reduces the ability of the firm, and
particularly of its managers, to understand foreign
information. As a result, the firm first expands into
countries that are close to the host country in terms
of psychic distance, and only later enters countries
that are more distant. The current paper focuses not
on the order of investment, but rather on the idea
that investors from countries with high corruption
will seek other countries with corruption. Hence we
hypothesize that:
Hypothesis 2: In comparison with FDI from
other countries, the relationship between host-
country corruption and FDI is positive for FDI
from countries with high corruption.
Research design
We test the hypotheses using data on bilateral FDI
inflows from 183 home economies to 106 host
economies. By including such a large number of
home countries, we are able to analyze how the
relationship between corruption and FDI varies
depending on the characteristics of the country of
origin of FDI. Previous studies of the impact of
corruption on FDI have analyzed FDI either from
one country only, or from a limited number of
home countries, usually developed or OECD coun-
tries, which tend to have low corruption. In
contrast to these studies, we use a large number of
host countries to be able to compare countries with
laws against bribery abroad and countries with high
journalof InternationalBusinessStudies
 Who cares about corruption?
812
levels of corruption with other countries that do
not have such characteristics.
The bulk of FDI data comes from the United
Nations Conference on Trade and Development
(UNCTAD)country profiles (UNCTAD,2005). This
database provides the widest coverage of bilateral
FDI inflows available. We complemented this
database with information on FDI from the OECD
(2004), which has been a common source of data in
other studies. We included all the countries for
which we have data. The list of countries appearsin
the Appendix.
Variablesand measures
Table 1 provides a summary of the variables,
measures, and sources of data. The dependent
variable is the natural log of bilateral FDI inflows
from a home country to a host country, measured
in US$ using the average foreign exchange rate for
the year.
The independent variable of interest is host-
country corruption. We used the indicator 'control
of corruption' provided in Kaufmann et al. (2003).
Corruption is illegal and, as such, difficult to
measure with any degree of precision. Studies rely
on subjective measures of corruption: for a discus-
sion of the alternative measures of corruption and
how they generate similar results, see Wei (2000a).
Kaufmann et al. (2003) created a composite mea-
sure that integrates 31 indicators from 14 different
sources using an unobserved components model,
weighting indicators by their precision. This
reduces the noise of single indicators. This compo-
site indicator uses not only polls of experts but also
surveys of businesspeople or citizens in the country.
Of all measures of corruption available, it has the
widest coverage, 184 economies, which we need to
avoid constraining the database. The indicator
measures control of corruption within an interval
of -2.5 (low control of corruption) to 2.5 (high
control of corruption). To simplify the interpreta-
tion of the coefficients, we rescaled the indicator by
subtracting the original index from 2.5, such that a
higher number indicates higher corruption and a
lower number indicates lower corruption.
To test Hypotheses 1 and 2 we used interaction
terms. We are interested in understanding how the
relationship between levels of corruption in the
host country and FDI varies depending on the
characteristics of the country of origin of the FDI.
Therefore we first introduced an indicator of host-
country corruption in the analysis. This captures
the general impact of host-country corruption on
Journalof InternationalBusinessStudies
AlvaroCuervo-Cazurra
FDI.We then introduced interaction terms between
host-country corruption and dummy indicators of
the type of country of origin of the FDI (countries
with laws against bribery abroad, and countries
with high corruption levels). These interactions
capture the additional influence of corruption on
FDI associated with countries with such character-
istics in relationship to countries that do not have
them: that is, countries that have low corruption
and do not have laws against bribery abroad. To test
these hypotheses, we then analyzed the sign and
significance of the coefficient of each product. We
also controlled for the country of origin of FDIwith
a dummy variable to capture other influences that
the country of origin has on FDI. Wei (2000a, 8)
provides a detailed explanation of this procedure,
which he used to test whether US investors are
more sensitive to corruption in the host country
than are investors from other developed countries.
Specifically, to test Hypothesis 1, we first mea-
sured countries that have laws against bribery
abroad using a dummy indicator that the country
has signed the OECD Convention on Combating
Bribery of Foreign Officials in International Busi-
ness Transactions. The countries that have done so
are the 30 members of the OECD, as well as
Argentina, Brazil, Bulgaria, Chile, Estonia, and
Slovenia. We multiplied this indicator by the
measure of host-country corruption. A negative
and statistically significant coefficient of this
product can be taken to provide support for
Hypothesis 1.
To test Hypothesis 2, we first measured countries
with high corruption using a dummy indicator that
the level of corruption in the home country is
above the average for all countries. Excluded from
this indicator were countries that have signed the
OECD Convention but that have high levels of
corruption: Argentina, Bulgaria, Mexico, and Tur-
key. This was done in order to avoid counting these
countries twice. We then multiplied the indicator
by host-country corruption. A positive and statisti-
cally significant coefficient of this product can be
taken to provide support for Hypothesis 2. We used
alternative indicators of high corruption (corrup-
tion above the average and half standard deviation,
corruption above the median, corruption in the top
third, corruption in the top sixth) to check for the
robustness of this measure. The results do not
change in sign or significance.
We controlled for other variables that may affect
the relationship between corruption and FDI
following a gravity model. The gravity model has
 Who cares about corruption? AlvaroCuervo-Cazurra
813

Table 1 Variables,measures, and sources of data

Variable Measure Source

Dependent variable Ln FDIinflows Natural log of FDIinflows into the country in UNCTAD(2005) or OECD(2004)
the year in US$

Independent Host country Indicatoron the level of corruptionin the host Constructed using data from aggregate
variable of interest corruption country, from 0 (low) to 5 (high) (2.5 minus governance indicatorsdatabase,
the original score for control of corruption) Kaufmannet al. (2003)
Home country Dummy indicator that the home country has Constructed using the list of signatory
with laws against signed the OECDConvention on Combating countries of the OECDConvention on
briberyabroad Briberyof Foreign Officialsin International Combating Briberyof Foreign Officials
BusinessTransactions,1 or 0 in InternationalBusinessTransactions
from OECD(2005)
Home country Dummy indicator that the level of corruption Constructed using data from aggregate
with high in the home country is above the average for governance indicatorsdatabase,
corruption all countries (2.5), 1 or 0. We exclude Kaufmannet al. (2003)
countries that have laws against bribery
abroad.

Control variables Ln GDP Natural log of gross domestic product in
power purchasing parity in US$
Population Number of inhabitants in the country, in
millions
Ln Distance Natural log of the greater circle distance
between the centers of the home and host
country in miles
Landlocked Indicatorthat the none, one, or both home
and host countries are landlocked, 0, 1, or 2
Island Indicatorthat the none, one, or both home
and host countries are island nations, 0, 1, or 2
Common border Dummy indicator of the existence of a
common border between the home and host
country, 1 or 0
Common language Dummy indicator of the existence of a
common language between the home and
host country, 1 or 0
Common colony Dummy indicator that the home and host
country were colonies of the same colonial
power after 1945, 1 or 0
Evercolonial link Dummy indicator that the home and host
country were ever under a colonial
relationship, 1 or 0
Restrictionson Indicatorsof trade policy, from 1 (very low
trade barriersto trade) to 5 (very high barriersto
trade)
Restrictionson FDI Indicatorsof capital flows and foreign direct
investment, from 1 (very low barriersto
foreign investment) to 5 (very high barriersto
foreign investment)
Data from world development
indicatorsdatabase, World Bank(2005)
Data from world development
indicatorsdatabase, World Bank(2005)
Computed using data on geographic
coordinates from CIA(2005)
Computed using data on coastline from
CIA(2005)
Computed using data on land
boundaries from CIA(2005)
Computed using data on land
boundaries from CIA(2005)
Computed using data on languages
from CIA(2005) and from Gordon
(2005)
Computed using data on independence
from CIA(2005) and on history from
EncyclopediaBritannica(2005)
Computed using data on independence
from CIA(2005) and on history from
EncyclopediaBritannica(2005)
Heritage Foundation (2005)
Heritage Foundation (2005)

been applied to the study of the determinantsof
FDI flows (e.g., Bevan and Estrin,2004), and in
particularto the impactof corruptionon FDI(e.g.,
Wei, 2000a).The theoreticalbasisis the proximity-
concentration hypothesis (Horstmann and
Markusen,1992;Brainard,1993).Thisidea extends
the ownership, location, and internationalization
paradigm of international production (Dunning,
1977) to highlight the challenges inherent in the
expansion of multinational enterprises (MNEs)
across borders, specifically the balancing of costs
or barriersagainst the benefits of scale economies.

Journalof InternationalBusinessStudies
 Who cares about corruption?
814
The gravity model has demonstrated its usefulness
in explaining bilateral FDI (e.g., Eaton and Tamura,
1995; Brenton et al., 1999; Wei, 2000a, b; Wei and
Wu, 2001; Bevan and Estrin, 2004) and in generat-
ing new theoretical insights on the distances that
firms face as they move abroad (e.g., Ghemawat,
2001).
The base gravity model explains FDI based on
indicators of the host country's size (GDP and
population) and the geographic distance between
home and host countries (Linneman, 1966). There-
fore, we controlled for the country's economic size
using indicators of gross domestic product and
population. Larger countries are more likely to
attract FDI,because MNEscan achieve the necessary
economies of scale in the country (e.g., Linneman,
1966). We controlled for geographic distance
between countries using an indicator of the great
circle distance, which measures distance on the
surface of the earth using longitude and latitude
coordinates. Distance indicates the existence of
transportation costs that would discourage trade
and favor FDI (e.g., Linneman, 1966; Wei, 2000a).
This distance measure is traditionally complemen-
ted by indicators of whether the country is land-
locked or an island, as these characteristics affect
the difficulty in transporting products, and there-
fore the likelihood of undertaking FDI (e.g., Frankel
and Rose, 2002). A final complement to distance is
the existence of a common land border between
the countries (e.g., Feenstra et al., 2001).
To these, we added controls of common political
and cultural backgrounds. Similarities in political
and cultural backgrounds facilitate FDI, because
investors benefit from a reduced psychic distance
between home and host countries (Johanson and
Vahlne, 1977; Ghemawat, 2001). Cultural similari-
ties were captured using an indicator of the
existence of a common language between home
and host country, which facilitates the transfer of
information across borders and a reduction of
psychic distance (Johanson and Vahlne, 1977;
Feenstraet al., 2001). Commonalities in administra-
tion were measured using indicators of the existence
of a colonial relationship, and the existence of a
common colonizer (e.g., Frankel and Rose, 2002).
Colonial powers traditionally imposed their admin-
istrative traditions, such as the legal system, upon
their colonies (La Porta et al., 1998).
We also controlled for restrictions to FDI and to
trade (e.g., Wei, 2000b). Restrictions to FDI are
likely to have a negative impact on FDI because the
government actively blocks it. We measure these
journalof InternationalBusinessStudies
AlvaroCuervo-Cazurra
with the indicator freedom of FDI and capital
flows of the Heritage Foundation. Restrictions to
trade are likely to have a positive impact on FDI
because firms are forced to serve the country with
domestic production rather than with exports. We
measure these with the indicator of freedom in
trade policy of the Heritage Foundation. These two
indicators take values from 0 (low barriers) to 5
(high barriers).
Method of analysis
Following Wei (2000a), we used a double-log model
with quasi-fixed-effects and one-year lag to analyze
the data. In the double-log model, we applied
natural logs to the dependent variable (FDI)and the
independent variable (GDP,distance) to ensure the
homoscedasticity of the error term (Wei, 2000a, 4).
We used a quasi-fixed-effects specification whereby
we controlled for the home country using a dummy
indicator for each country. These home country
dummies were designed to capture characteristics
of the home country that may affect its FDIabroad,
including its economic size and level of develop-
ment. We did not include dummies for host
countries because doing so would eliminate the
possibility of estimating the impact of corruption
on FDI. The dependent variable was measured at
the end of 1999, because this is after the legislation
barringbribery abroad was signed (November 1997)
and came into effect (February 1999). The inde-
pendent variables were measured one year earlier
(1998) in order to account for the time lag that
occurs between the decision to invest and the
actual FDI. Finally, because the log of FDI takes
positive values, we used a Tobit specification
(Tobin, 1958; Maddala, 1983). We used a modified
Tobit specification because the log of zero is
undefined (for a discussion of this model see Eaton
and Tamura, 1995; Wei, 2000a). Therefore the
specification of the empirical model we used is
the following:
Ln FDIt - country corruptionjt-1
y71Host
+ y2Homecountry with high
x Host country corruptionit_1
corruptiont1(1)
+ y3Homecountry with laws against
briberyabroadit-1
x Host country corruptiont_1-+Xijt-1if+Eij
where Xijt-_ is a vector of the control variables; y1,
Y2 and 73 are the parameters of interest; f is a vector
of other parameters;and e is the error.
 Table 2 Summary statistics and correlationmatrix
Variable Mean Std. dev. 1 2 3 4 5 6 7 8 9 10

1. Ln FDI inflows 2.230 3.424 1

2. Host-country 2.500 1.000 -0.327*** 1
corruption
3. Home country 0.252 0.434 -0.334*** 0.018 1
with high
corruption
4. Home country 0.546 0.497 0.350*** -0.037+ -0.628*** 1
with laws against
bribery abroad
5. Ln GDP 18.628 1.928 0.437*** -0.480*** 0.025+ -0.040÷
6. Population 32.676 52.456 0.291*** -0.161*** 0.030* -0.048** 0.733*** 1
7. Ln Distance 7.858 0.997 -0.108*** 0.068*** -0.042* -0.053** 0.060** 0.188*** 1
8. Landlocked 0.328 0.531 -0.200*** 0.215*** 0.011 0.040* -0.325*** -0.193*** -0.205*** 1
9. Island 0.253 0.476 -0.033 -0.146*** -0.080*** -0.136*** 0.059** 0.080*** 0.276*** -0.174*** 1
10. Common 0.059 0.236 0.092*** 0.010 0.115*** -0.004 0.010 -0.005 -0.440*** 0.092*** -0.130*** 1
border
11. Common 0.155 0.362 0.060* 0.064** 0.108*** -0.083*** -0.135*** -0.057** -0.134*** -0.010 0.003 0.220*
language
12. Common 0.046 0.210 -0.053* 0.131** 0.140*** -0.116*** -0.164*** -0.085*** -0.105 0.097*** -0.050** 0.125*
colony
13. Ever colonial link 0.042 0.200 0.124*** -0.030 -0.025 0.079*** 0.004 0.003 -0.037* -0.062** -0.044* 0.145*
14. Restrictions 2.389 0.689 -0.252*** 0.450*** 0.017 -0.041* -0.158*** 0.081** 0.090*** 0.229*** 0.026 0.008
on FDI
15. Restrictions 2.681 1.138 -0.139*** 0.496*** -0.079*** 0.047* -0.201** 0.007 0.063** 0.033* -0.087*** 0.028
on trade
0
Significance levels: +P<0.1, *P<0.05, **P<0.01, ***P<0.001.
3

=3

ou

c•
Lei
 Who cares about corruption? AlvaroCuervo-Cazurra
816

Results from countries with laws against bribery is further

Table 2 presents the summary statistics and correla-
tion matrix. The average bilateral FDI inflow is
US$508 million, with a maximum of US$116,605
million from the UK to the US. Of the 183 countries
for which we have FDI data, 36 countries are
classified as having laws against bribery abroad
and 117 are classified as having high corruption.
Although some of the variables show high correla-
tion coefficients, the analyses are not subject to
multicollinearity. The variance inflation matrix
suggested not using natural logs for the population
measure in order to reduce its multicollinearity
with the GDP measure.
The results of the analysis appear in Table 3.
Model 1 shows the analysis with only the control
variables. Models 2 and 3 show the partial analyses.
Model 4 shows the full analysis. We discuss the
results of the full analysis. The results support
Hypothesis 1 and Hypothesis 2. First, the coeffi-
cient of the product of the indicator of countries
with laws against bribery abroad and host-country
corruption is negative and statistically significant
(P< 0.05), supporting Hypothesis 1. In other words,
in comparison with FDI from other countries, FDI
reduced as a result of host-country corruption.
Second, the coefficient of the product of the
indicator of home country with high corruption
and host-country corruption is positive and statis-
tically significant (P<0.05), supporting Hypothesis
2. In other words, in comparison with FDI from
other countries, FDI from countries with high
corruption is less discouraged by host-country
corruption.
Alternative explanations
We argued that not all investors care about
corruption: while FDI from countries with laws
against bribery abroad is deterred by host-country
corruption, FDI from countries with high levels of
corruption is attracted by host-country corruption.
However, there do exist some plausible alternative
explanations. We analyze four that warrant discus-
sion, and show that none appear to be supported.
The first alternative explanation is the idea that
the majority of FDI of OECD countries, which
represent the world's highest-income nations, goes
to other OECD nations, and that the majority
of FDI from low-income countries goes to other

Table 3 Resultsof the analyses of the change in the relationshipbetween corruptionand FDIdepending on the characteristicsof the
country of origin of FDI
Dependent variable:Ln FDIinflows

Model 1 Model 2 Model 3 Model 4

Home country with laws against bribery -0.575*** (0.129) -0.323* (0.162)
abroad x host-country corruption
Home county with high 0.707*** (0.181) 0.460* (0.219)
corruptionx host-country corruption
Host-countrycorruption -0.345*** (0.081) 0.078 (0.124) -0.443*** (0.084) -0.170 (0.160)
Ln GDP 0.480*** (0.067) 0.493*** (0.066) 0.464*** (0.066) 0.473*** (0.066)
Population 0.008*** (0.001) 0.008*** (0.001) 0.009*** (0.001) 0.008*** (0.001)
Ln Distance -0.833*** (0.089) -0.725*** (0.091) -0.799*** (0.090) -0.756*** (0.092)
Landlocked -0.039 (0.190) -0.089 (0.188) -0.088 (0.189) -0.112 (0.189)
Island -0.479t (0.250) -0.545* (0.247) -0.488* (0.249) -0.515* (0.249)
Common border 0.709* (0.292) 0.623* (0.289) 0.529t (0.294) 0.543t (0.293)
Common language 0.542* (0.226) 0.602** (0.223) 0.581* (0.226) 0.602** (0.226)
Common colony -0.197 (0.510) -0.261 (0.503) -0.307 (0.507) -0.281 (0.506)
Evercolonial link 0.714* (0.320) 0.752* (0.316) 0.672* (0.321) 0.676* (0.320)
Restrictionson FDI -0.218t (0.125) -0.209t (0.124) -0.253* (0.125) -0.244t (0.125)
Restrictionson trade 0.027 (0.072) 0.031 (0.071) 0.031 (0.072) 0.030 (0.072)
Intercept 4.843*** (1.515) 4.037** (1.506) 5.144*** (1.510) 4.719** (1.519)
z2 1073.09*** 1092.42*** 1079.68*** 1083.64***
Pseudo R2 0.228 0.232 0.232 0.233
Log likelihood -1881.762 -1802.099 -1778.227 -1776.249

Significance levels: tP<0.1, *P<0.05, **P<0.01, ***P<0.001.

Theanalyseshavesourcecountrydummiesthatarenot reportedhere.

Journalof InternationalBusinessStudies
 Who cares about corruption?
low-income countries. This idea does not appear to
be supported. First,in the analysis we addressedthis
through controls. We controlled for GDP and
population of the host country in order to account
for the attractiveness of richer, more populous
nations. Both controls have positive coefficients
that are statistically significant at P< 0.001. We also
controlled for the characteristics of the country of
origin using a dummy variable for each source
country.
Second, the analysis of the distribution of FDI
flows does not support this alternative explanation.
To maintain consistency with the previous ana-
lyses, we separated countries into two groups: those
that signed the OECD Convention, and those that
did not. First,countries that signed the Convention
are the largest sources of FDI in the world,
regardless of the characteristics of the destination
country. We observe that the majority of FDI flows
going into countries that signed the Convention
originate in other countries that signed the Con-
vention (98.4%), but a similar pattern of behavior
appears in countries that did not sign the Conven-
tion. The majority of FDI flowing into countries
that did not sign the Convention originates in
countries that signed the Convention (88.4%).
Second, countries that did not sign the Convention
do not concentrate their investments in other
countries that did not sign the Convention.
Instead, the majority of FDIoriginating in countries
that did not sign the Convention goes to countries
that signed the Convention (68.9%). We conducted
an additional check of the distribution of FDIflows
because not all the countries that signed the OECD
Convention are usually considered high-income.
The Group of 7 (G7) countries (Canada, France,
Germany, Italy,Japan, UK, and USA)are commonly
considered the most developed in the world.
Therefore, we identify high-income nations as G7
countries, and classify the remainder as low
income. Our analysis using this alternative classifi-
cation confirms the previous findings. G7 countries
are the source of the majority of FDI flows world-
wide, regardless of the country of destination. The
majority of FDI flowing into G7 countries comes
from other G7 countries (73.7%). Similarly, the
majority of FDI flowing into non-G7 countries
comes from G7 countries (61.5%). Non-G7 coun-
tries concentrate their investments in G7 countries.
The majority of FDI from non-G7 countries goes to
G7 countries (56.7%).
Third, in this paper we do not separate countries
by level of income or development. We use other
AlvaroCuervo-Cazurra
817
characteristics: having laws against bribery abroad
or having high levels of corruption. Although many
of the countries that have laws against bribery
abroad are high income, others are not. Similarly,
although many of the countries with high levels of
corruption are low income, others are not. The
analysis of the sensitivity of FDI from countries
with different levels of income to corruption in the
host country would require a separate study.
A second alternative explanation is that there are
capital controls biased towards some nations,
particularly high-income nations. We controlled
for capital controls in our data analysis. We found
that the existence of restrictions to FDI, a measure
that includes capital controls, has a negative
coefficient that is statistically significant in most
models.
It is unlikely that capital controls that are biased
towards all high-income nations are widespread
enough to affect the results. This would require that
a large number of countries limit FDIfrom all high-
income nations, while allowing FDI from low-
income nations. The reality is that limitations to
FDI from one high-income nation tend to result in
FDI coming from another high-income nation. For
example, limitations to FDI from US oil firms in
some Middle Easternnations have resulted in large
FDIby French firms. Moreover,low-income nations
may also face discriminatory controls when invest-
ing in high-income nations. For example, in 2005
the US Congress prevented the acquisition of the
US oil firm Unocal by the Chinese oil firm CNOOC.
Even in the case of regional trade and investment
agreements that favor some countries over others,
this discrimination applies only to countries not in
the agreement, regardless of their level of income.
Finally, capital controls that discriminate against a
particularnation are not permitted under the WTO.
Temporary capital controls are allowed, but dis-
crimination according to country of origin is
prohibited under the most-favored-nation clause
in the General Agreement on Tradein Goods, in the
Agreement on Trade-Related Investment Measures,
and in the General Agreement on Trade in Services.
The WTO has 149 member countries and 32
observer countries, or countries in the accession
process. Only a reduced number of very small
countries in our list of host economies are not
members or observers of the WTO. The amount of
FDI they receive is not large enough to bias the
results.
A third alternative explanation is that the OECD
Convention on Combating Bribery of Foreign
journalof InternationalBusinessStudies
 Who cares about corruption?
818
Public Officials in International Business Transac-
tions does not have the strong impact suggested,
and that the variable instead captures the concen-
tration of FDI from OECD countries into other
OECDcountries. As we indicated above, we control
for home country and for the size of the host
country. The distribution of FDI inflows does
not support the notion that OECDcountries invest
only in other OECDcountries. They are the largest
investors not only in other OECD countries,
but also in non-OECD countries.
We conducted additional tests to analyze whether
the Convention has been effective in altering the
sensitivity of FDI from countries that signed it to
host-country corruption. To explore this, we ran an
additional test (available upon request) comparing
the sign and statistical significance of the coeffi-
cient of the interaction between the indicator that
the country has signed the OECDConvention and
the level of host-country corruption before and
after the Convention came into force. This analysis
is inspired by Hines's (1995) study of the effective-
ness of the FCPA.We observe that the coefficient
is not statistically different from zero in the
time period before the Convention came into
force (years 1997 and 1998), but it becomes
negative and statistically significant (P<0.001)
afterit came into force (years1999 and 2000). We
conductedan additionalanalysisthat separatesthe
G7, all of which signed the Convention, from other
countries that signed the OECD Convention to
check that the previousresults are not driven by
FDI from the largest source countries, which are
also low-corruption countries. We find that the
coefficient of the interaction between the indicator
that the country is in the G7 and the level of host-
country corruption is not statistically different
from zero in 1997, it becomesnegativeand weakly
statistically significant in 1998 (P<0.1), and
becomes statistically significant (P<0.001) in
1999 and 2000. We also find that the coefficient
of the interaction between the indicator that the
country signed the Convention but is not in the G7
and the level of host-country corruption is positive
and statistically significant in 1997, becomes not
statistically different from zero in 1998, and
becomes negative and statistically significant in
1999 (P<0.05) and in 2000 (P<0.01). We interpret
these results as support for the idea that the OECD
Convention has altered the sensitivity to host-
country corruption of investors from countries that
signed the Convention. Nevertheless, we acknowl-
edge that there are variations in the effectiveness of
journalof InternationalBusinessStudies
Alvaro
Cuervo-Cazurra
the implementation of the Convention across
countries, and that more detailed analyses of the
specificlaws in each countryare necessary.
A fourth alternative explanation is that the
indicator of home country with high corruption
capturesthe influence of the differencein corrup-
tion scores on FDI discussed by Habib and
Zurawicki (2002). Their and our studies differ
markedly. First,the analysis of Habib and Zurawicki
includes only developed,relativelylow-corruption
countries among the seven home countries they
analyze (Germany,Italy,Japan, Korea,Spain, UK,
and the USA);it is a matter of empiricaltest to
confirmthat their resultsapply to home countries
that truly have high corruption. Second, the
variables used in each study capture different
constructs.The variableused in our study - home
country with high corruption - is an absolute
variable. A home country is either classified as
having high levels of corruption,or it is not. The
variable used in their study - differences in
corruption scores - is measured relative to
other countries. A country is classifiedas having
higher or lower levels of corruptionthan another.
Thesetwo variablesproducedifferentclassifications
of countries,which are likely to result in different
insights.
Discussion and conclusions
In the present paper, we examined the effect of
corruption on FDI. Corruption creates challenges
for investors, because it increases the cost of
operating abroad, as well as the uncertainty and
risk involved. Previous studies have argued that
corruption discourages FDI.However, we argue that
corruption does not impact on all foreign investors
equally, because there is variability in the cost of
engaging in bribery abroad. Investors from coun-
tries that have laws against bribery abroad are likely
to further limit their FDI in countries with high
levels of corruption. These laws increase the cost of
engaging in bribery abroad. In contrast, investors
from countries with high levels of corruption
appear not to limit their FDI in other countries
that also have high levels of corruption. They have
experienced corruption at home. As a result, they
are apparently not deterred by corruption as much
as other investors. They may even seek countries
with high corruption.
These are important findings that add depth to
our understanding of the impact of corruption on
FDI. Scholars need to be aware that FDI from
different countries is affected differently by
 Who cares about corruption?
host-country corruption. Corruption apparently
further discourages FDI from countries that
have signed the OECD Convention, whereas it
does not deter FDI from countries with
high corruption. The implication of these two
findings is that corruption in the host country
not only reduces FDI, but also changes the
composition of FDI. Consequently, a government
that confronts and reduces corruption in the
country is likely to be rewarded not only with
more FDI, but also with more FDI from countries
that actively discourage bribery and with less FDI
from countries that have high levels of corruption.
This will reinforce the efforts of the government in
combating corruption.
There are several limitations to this study that
arise from the nature of the data presented here
that can be addressed in future research. First, we
do not have disaggregated data at the firm level.
Futureresearch can analyze firm-level data to study
differences among investors (e.g., Hakkala et al.,
2004). Second, we have assumed a degree of
homogeneity in the industries of operation because
we do not have disaggregated data at the industry
level. Future research can explore how the char-
acteristics of the industry affect the impact of
corruption on FDI. Third, we have used available
measures indicating the level of perceived
corruption in the country. However, corruption
has various dimensions, each of which may
have a differential impact on the investment
decisions of firms, as argued by Rodriguez et al.
(2005). Fourth, we analyzed FDI flows captured
in national accounts. The insights generated
may not generalize to investors who do not
engage in FDI abroad but use instead other
methods of internationalization, such as interna-
tional trade or contractual relationships. Future
research can compare differences in the effect of
corruption on the behavior of firms that use
alternative internationalization methods, and how
these differences vary according to the country of
origin of the investors.
Overall, the present paper contributes to two
streams of research, one that studies the relation-
ship between corruption on FDI, and another that
analyzes the influence of the country of origin on
the behavior of MNEs. With respect to the first
line of inquiry, the paper provides a better under-
standing of the impact of corruption on FDI by
highlighting differences in the sensitivity to host-
country corruption among FDI from different
home countries. Future studies should be explicit
AlvaroCuervo-Cazurra
819
about the sensitivity of the country of origin of FDI
to host-country corruption in their analyses of the
relationship between host-country corruption and
FDI. This paper also hints at the usefulness of laws
against bribery abroad. Although it is necessary to
prosecute the demand for bribes with legislation at
home to reduce distortions and enable growth
(Shleifer and Vishny, 1993; Mauro, 1995), prosecut-
ing the supply of bribes with laws against bribery
abroad may also help. However, to be effective,
these laws require a multilateral approach. When
investors from multiple countries are subject to
these legal constraints, government officials face
difficulties in extracting bribes from foreign firms.
Otherwise, when investors from only one country
are legally constrained not to pay bribes, govern-
ment officials will simply allocate contracts and
extract bribes from firms coming from countries
that do not have these legal constraints, continuing
the vicious circle of corruption.
With respect to the second line of research, this
paper highlights the importance of understanding
the characteristics of the country of origin when
studying the internationalization of firms. This
contributes to a better understanding of the impact
of location on internationalization, an area that
has been neglected relative to the related areas
of ownership and internalization advantages
(Dunning, 1998). Future studies should take into
account not only the benefits but also the costs of
coming from a particularlocation if we are to better
understand the selection of countries and entry
strategies.
Acknowledgements
The paper benefited from suggestions by the Guest
Editor Peter Rodriguez,three anonymous reviewers,
the discussant Marty Meznar, Chuck Kwok, Kendall
Roth, Annique Un, and the audience at the JIBS
Focused Issue Workshop in Phoenix, Arizona. The
School of Global Management and Leadership at
Arizona State Universityat the West campus, Lally
School of Management and Technology at Rensselaer
PolytechnicInstitute,the Departmentof Economicsat
RensselaerPolytechnic Institute, and the Center for
International Business Education and Research at
Thunderbird, The Garvin School of International
Management, provided financial support for the
Workshop.Fundingfrom the Center for International
BusinessEducationand Researchat the Universityof
South Carolinais gratefullyacknowledged. All errors
remain mine.
Journal of International Business Studies
 Who cares about corruption?
820
References
Ades, A. and Di Tella, R. (1997) 'National champions and
corruption: some unpleasant interventionist arithmetic', Eco-
nomicJournal107(443): 1023-1043.
Bevan, A.A. and Estrin,S. (2004) 'The determinants of foreign
direct investment into Europeantransitioneconomies', Journal
of ComparativeEconomics32(4): 775-787.
Brainard,L. (1993) 'A simple theory of multinational corpora-
tions and trade with a trade-off between proximity and
concentration', NBERworking paper #4269, National Bureau
of Economic Research,Cambridge, MA.
Brenton, P., Di Mauro, F. and Lucke, M. (1999) 'Economic
integration and FDI:an empirical analysis of foreign invest-
ment in the EU and in central and eastern Europe', Empirica
26(2): 95-121.
Calhoun, M.A. (2002) 'Unpacking liability of foreignness:
identifying culturally driven external and internal sources of
liability for the foreign subsidiary', Journal of International
Management8(3): 301-321.
CIA(2005) WorldFactbook.https://www.cia.gov/cia/publications/
factbook/index.html.
De Soto, H. (1989) The OtherPath, Harper& Row: New York.
Donaldson, T. (1996) 'Values in tension: ethics away from
home', HarvardBusinessReview74(5): 4-12.
Dunning, J.H.(1977) 'Trade, Locationof Economic Activityand
the MNE:A Searchfor an EclecticApproach', in B. Ohlin, P.O.
Hesselborn and P.M. Wijkman(eds.) The InternationalAlloca-
tion of EconomicActivity,Macmillan:London, 395-418.
Dunning, J.H.(1998) 'Locationand the multinationalenterprise:
a neglected factor?' Journalof InternationalBusiness Studies
29(1): 45-66.
Eaton, J. and Tamura,A. (1995) 'Bilateralismand regionalism in
Japaneseand US trade and direct foreign investment patterns',
NBERworking paper #4758, National Bureau of Economic
Research,Cambridge, MA.
Elliot,K. (1997) 'Corruptionas an InternationalPolicy Problem:
Overview and Recommendations', in K. Elliot(ed.) Corruption
and the GlobalEconomy,Institutefor InternationalEconomics:
Washington, DC, 175-233.
EncyclopediaBritannica(2005) http://www.britannica.com/.
Eriksson,K., Johanson,J., Majkgard,A. and Sharma,D.D. (1997)
'Experientialknowledge and cost in the internationalization
process',Journalof InternationalBusinessStudies28(2): 337-360.
Feenstra, R.C., Markusen,J.R.and Rose, A.K. (2001) 'Using the
gravity equation to differentiateamong alternativetheories of
trade', CanadianJournalof Economics34(2): 430-447.
Frankel,J. and Rose, A. (2002) 'An estimate of the effect of
common currencieson trade and income', QuarterlyJournalof
Economics117(2): 437-466.
Ghemawat, P. (2001) 'Distance still matters. The hard realityof
global expansion', HarvardBusinessReview79(8): 137-147.
Gordon Jr,R.G.(ed.) (2005) Ethnologue:Languagesof the World,
15th edn, SILInternational:Dallas,TX, Online version: http://
www.ethnologue.com/.
Habib, M. and Zurawicki, L. (2002) 'Corruption and foreign
direct investment', Journal of InternationalBusiness Studies
33(2): 291-307.
Hakkala, K., Norback, P. and Svaleryd, H. (2004) 'FDI and
corruption:evidence from Swedish multinationalfirms', Paper
presented at the European Trade Study Group meeting in
Nottingham,UK,11 September,http://www.etsg.org/ETSG2004/
Papers/Hakkala.pdf.
Henisz, W.J. (2000) 'The institutional environment for multi-
national investment', Journalof Law, Economicsand Organiza-
tion 16(2): 334-364.
Heritage Foundation (2005) 'Index of ECONOMICFreedom',
[www document] http://www.heritage.org/research/features/
index/. (accessed 24 December 2005).
Hines, J.R. (1995) 'Forbidden payment: foreign bribery and
american business after 1977', NBERworking paper #5266,
National Bureauof Economic Research,Cambridge, MA.
Journal of International Business Studies
AlvaroCuervo-Cazurra
Horstmann, I.J.and Markusen,J.R.(1992) 'Endogenous market
structuresin internationaltrade (Natura FacitSaltum)',Journal
of InternationalEconomics32(1-2): 109-129.
Huntington, S.P. (1968) PoliticalOrderin ChangingSocieties,Yale
UniversityPress:New Haven, CT.
Hymer,S. (1976) TheInternationalOperationsof NationalFirms:A
Studyof DirectForeignInvestment,MITPress:Cambridge, MA.
Johanson, J. and Vahlne, J. (1977) 'The internationalization
process of the firm: a model of knowledge development and
increasing foreign market commitments', Journalof Interna-
tional BusinessStudies8(1): 23-32.
Johanson, J. and Wiedersheim-Paul,F. (1975) 'The internationa-
lization of the firm: four Swedish case studies', Journal of
Management Studies 12(3): 305-322.
Kaikati,J. and Label, W.A. (1980) 'The foreign antibriberylaw:
friend or foe?' ColumbiaJournalof WorldBusiness15(1): 46-51.
Kaufmann, D. (1997) 'Corruption: the facts', Foreign Policy
107(Summer): 114-131.
Kaufmann,D., Kraay,A. and Mastruzzi,M. (2003) 'Governance
matters iii: governance indicators 1996-2002', World Bank
Working Paper #3106, World Bank, Washington, DC.
La Porta, R., Lopez-de-Silanes,F., Shleifer, A. and Vishny, R.W.
(1998) 'Law and finance', Journalof PoliticalEconomy106(6):
1113-1155.
Lambsdorff, J.G. (2003) 'How corruption affects persistent
capital flows', Economicsof Governance4(3): 229-243.
Leff,N.H. (1989) 'Economic Development through Bureaucratic
Corruption', in A.J. Heidenheimer, M. Johnston and V.T.
LeVine(eds.) PoliticalCorruption:A Handbook,New Brunswick
NJ:TransactionBooks, pp: 389-403.
Linneman,H. (1966) An EconometricStudyof InternationalTrade
Flows,North-Holland:Amsterdam.
Lui, F.T. (1985) 'An equilibrium queuing model of bribery',
Journalof PoliticalEconomy93(4): 760-781.
Maddala, G.S. (1983) Limited-Dependentand Qualitative Vari-
ables in Econometrics,Cambridge UniversityPress:;New York.
Mauro, P. (1995) 'Corruptionand growth', QuarterlyJournalof
Economics110(3): 681-712.
Mauro,P. (1998) 'Corruptionand the composition of government
expenditure',Journalof PublicEconomics69(2): 263-279.
OECD (1996) 'Recommendation of the Council on the Tax
Deductibility of Bribes to Foreign Public Officials', [www
document] http://www.olis.oecd.org/olis/1996doc.nsf/LinkTo/
c(96)27-final (accessed July6, 2005).
OECD (1997) 'Convention on Combating Bribery of Foreign
Public Officials in InternationalBusiness Transactions', [www
document] http://www.olis.oecd.org/olis/1997doc.nsf/LinkTo/
daffe-ime-br(97)20(accessed July6, 2005).
OECD(2004) InternationalDirectInvestmentStatistics Yearbook:
1992-2003, Organization for Economic Cooperation and
Development: Paris.
OECD(2005) InternationalDirectInvestmentStatistics Yearbook:
1992/2003-2004 Edition. Paris:OECD.
Prahalad, C.K. and Bettis, R.A. (1986) 'The dominant logic: a
new linkage between diversity and performance', Strategic
ManagementJournal7(6): 485-502.
Rodriguez, P., Uhlenbruck,K. and Eden, L. (2005) 'Government
corruptionand the entry strategies of multinationals',Academy
of Management Review30(2): 383-396.
Rose-Ackerman, S. (1999) Corruption and Government,
Cambridge UniversityPress:Cambridge.
Shleifer, A. and Vishny, R.W. (1993) 'Corruption', Quarterly
Journalof Economics108(3): 599-617.
Smarzynska,B.K.and Wei, S. (2000) 'Corruptionand composi-
tion of foreign direct investment: firm-level evidence', NBER
working paper #7969, National Bureauof Economic Research,
Cambridge, MA.
Tanzi, V. (1998) 'Corruption around the world: causes,
consequences, scope, and cures', IMF Staff Papers 45(4):
559-594.
 Who cares about corruption? AlvaroCuervo-Cazurra
821

Tobin,J. (1958) 'Estimationof relationships

for limiteddepen- Homecountries
dent variables', Econometrica26(1): 24-36.
UNCTAD (2005) 'World investment directory on-line. FDI Afghanistan, Albania, Algeria, Andorra, Angola,
country profiles', [www document] http://www.unctad. Anguilla, Antigua Barbuda, Argentina, Armenia,
org/Templates/Page.asp?intltemlD=3198&lang=1 (accessed Aruba, Australia, Austria, Azerbaijan, Bahamas,
June 7, 2005). Bahrain, Bangladesh, Barbados, Belarus, Belgium/
US Congress (1977) The Foreign CorruptPracticesAct of 1977,
[www document] http://www.usdoj.gov/criminal/fraud/fcpa/ Luxembourg, Belize, Bermuda, Bhutan, Bolivia,
fcpastat.htm (accessed June 20, 2005). Bosnia Herzegovina, Botswana, Brazil, British
Voyer, P.A. and Beamish, P.W. (2004) 'The effect of corruption
on japanese foreign direct investment', Journal of Business Virgin Islands, Brunei, Bulgaria, Cameroon,
Ethics50(3): 211-224. Canada, Cape Verde, Cayman Islands, Chad,
Wei, S. (2000a) 'How taxing is corruption on inter- Channel Islands, Chile, China, Colombia,
national investors?' The Review of Economic and Statistics
Congo, Cook Islands, Costa Rica, Croatia, Cuba,
Wei, S. (2000b) 'Local corruption and global capital flows', Cyprus, Czech Republic, Denmark, Dominica,
BrookingsPapers on Economic Activity2000(2): 303-354. Dominican Republic, Ecuador, Egypt, El Salvador,
Wei, S. and Wu, Y. (2001) 'Negative alchemy? Corruption,
composition of capital flows, and currency crises', NBER
Estonia, Faeroe Islands, Fiji, Finland, France,
working paper #8187, National Bureau of Economic Research, French Polynesia, Gambia, Georgia, Germany,
Cambridge, MA. Gibraltar, Greece, Grenada, Guatemala,
Wheeler, D. and Mody, A. (1992) 'International investment
location decisions: the case of USfirms',Journalof International Guernsey, Guinea-Bissau, Guyana, Honduras,
Economics33(1-2): 57-76. Hong Kong, Hungary, Iceland, India, Indonesia,
World Bank (2005) World DevelopmentIndicators,[www Iran, Iraq, Ireland, Isle of Man, Israel, Italy, Ivory
document] http://www.worldbank.org/data/ (accessed July Coast, Jamaica, Japan, Jersey, Jordan, Kazakhstan,
10,2005).
Zaheer, S. (1995) 'Overcomingthe liabilityof foreignness', Kenya, Kuwait, Kyrgyzstan, Laos, Latvia, Lebanon,
Academyof Management Journal38(2): 341-363. Liberia, Libya, Liechtenstein, Lithuania, Macau,
Macedonia, Malawi, Malaysia, Mali, Malta,
Marshall Islands, Mauritania, Mauritius, Mexico,
Moldova, Monaco, Mongolia, Morocco,
Myanmar, Nauru, Nepal, Netherlands,
Appendix Netherlands Antilles, New Caledonia, New
Home and host countries Zealand, Nicaragua, Nigeria, Niue, North Korea,
Northern Marianas, Norway, Oman, Pakistan,
Hostcountries Palau, Panama, Papua New Guinea, Paraguay,
Algeria, Angola, Anguilla, Argentina, Armenia, Peru, Philippines, Poland, Portugal, Puerto Rico,
Aruba, Australia, Austria, Azerbaijan, Bahamas, Qatar, Reunion, Romania, Russia, Saint Kitts
Barbados, Belgium/Luxembourg, Belize, Benin, Nevis, Saint Vincent Grenadines, San Marino,
Bermuda, Bolivia, Brazil, Brunei, Bulgaria, Saudi Arabia, Serbia Montenegro, Seychelles,
Burkina Faso, Burundi, Cambodia, Cameroon, Sierra Leone, Singapore, Slovakia, Solomon
Canada, Cape Verde, Central African Republic, Islands, South Africa, South Korea, Spain, Sri
Chad, Chile, Colombia, Comoros, Costa Rica, Lanka, Sudan, Suriname, Swaziland, Sweden,
Cuba, Czech Republic, Denmark, Djibouti, Switzerland, Syria, Taiwan, Tajikistan, Tanzania,
Dominican Republic, Ecuador, El Salvador, Thailand, Trinidad and Tobago, Tunisia, Turkey,
Eritrea, Estonia, Ethiopia, Finland, France, Turkmenistan, Turks and Caicos, Uganda, UK,
Gambia, Germany, Greece, Guatemala, Guyana, Ukraine, United Arab Emirates, Uruguay, US
Haiti, Honduras, Hungary, Iceland, Ireland, Italy, Virgin Islands, US, Uzbekistan, Vanuatu, Vatican,
Jamaica, Japan, Kazakhstan, Korea, Kyrgyzstan, Venezuela, Viet Nam, Wallis and Futuna, Western
Latvia, Lithuania, Macau, Macedonia, Malawi, Samoa, Yemen, Zambia, Zimbabwe.
Mali, Mauritius, Mexico, Moldova, Mongolia,
Morocco, Mozambique, Myanmar, Netherlands, Homecountriesthat do not appearin the list of host
Netherlands Antilles, New Zealand, Nicaragua, countries
Norway, Panama, Paraguay, Peru, Poland, Afghanistan, Albania, Andorra, Antigua Barbuda,
Portugal, Russia, Rwanda, Saint Kitts Nevis, Saint Bahrain, Bangladesh, Barbados, Belarus, Bhutan,
Lucia, Sierra Leone, Slovakia, Slovenia, Somalia, Bosnia Herzegovina, Botswana, British Virgin
Spain, Suriname, Sweden, Switzerland, Tanzania, Islands, Cayman Islands, Channel Islands,
Trinidad Tobago, Tunisia, Turkey, Uganda, UK, China, Congo, Cook Islands, Croatia, Cyprus,
Uruguay, US, Uzbekistan, Venezuela, Zambia, Dominica, Egypt, Faeroe Islands, Fiji, French
Zimbabwe. Polynesia, Georgia, Gibraltar, Grenada, Guernsey,

journal of International Business Studies

 Who cares about corruption?
822
Guinea-Bissau, Hong Kong, India, Indonesia, Iran,
Iraq, Isle of Man, Israel, Ivory Coast, Jersey,Jordan,
Kenya, Kuwait, Laos, Lebanon, Liberia, Libya,
Liechtenstein, Malaysia, Malta, Marshall Islands,
Mauritania, Monaco, Nauru, Nepal, New
Caledonia, Nigeria, Niue, North Korea, Northern
Marianas, Oman, Pakistan, Palau, Papua New
Guinea, Philippines, Puerto Rico, Qatar, Reunion,
Romania, Saint Vincent Grenadines, San Marino,
Saudi Arabia, Serbia Montenegro, Seychelles,
Singapore, Solomon Islands, South Africa, Sri
Lanka, Sudan, Swaziland, Syria, Taiwan,
Tajikistan, Thailand, Turkmenistan, Turks and
Caicos, Ukraine, United Arab Emirates, US Virgin
Islands, Vanuatu, Vatican, Viet Nam, Wallis and
Futuna, Western Samoa, Yemen.
Acceptedby LorraineEden,ArmyHillman, PeterRodriguez,Donald Siegeland PeterRodriguez,GuestEditors,17 April2006. Thispaper has been with the
author for two revisions.
Journalof InternationalBusinessStudies
AlvaroCuervo-Cazurra
About the author
Alvaro Cuervo-Cazurra is an Assistant Professorof
International Business at the Moore School of
Business, University of South Carolina. His primary
research interest is understanding how firms devel-
op resources to become competitive and how they
then become international. He is also interested in
governance issues. He has started a long-term
project to analyze the emergence and success of
developing-country multinationals. ProfessorCuer-
vo-Cazurra holds a Ph.D. from MIT and a Ph.D.
from Salamanca University in Spain. Before joining
the University of South Carolina, he was an
assistant professor at the University of Minnesota
and a visiting assistant professor at Cornell
University.