Essay: The relationship between corruption and foreign direct investment

It is no news that the concept of foreign direct investment (FDI) has become very prevalent in the world today. The advent of globalization which has led to a decrease in investment and trade barriers, improvement in transportation and communication infrastructures amongst other benefits, has more than ever emphasized the need for cross border trade (Madura and Fox, 2011). Foreign direct investment has been defined in a number of ways by several scholars and international organizations. According to World Bank (2012) foreign direct investment can be defined as “net inflows of investment to acquire a lasting interest in or management control over an enterprise operating in an economy other than that of the investor”. Moosa (2002) elucidates that the term ‘lasting interest in’ or ‘management control’ signifies a minimum of 10% ownership of voting stocks. Furthermore, Spar (2009) defines FDI as the complete flow of capital and technology or a transfer of resources from one location to another. Based on these definitions, it is clear that foreign direct investment offer immense benefits not just to the source country but more importantly to the host country. Some of the benefits to the host country include, increased gross domestic product (GDP), reduction in the level of unemployment, improvement in human and managerial skills, transfer of technology and a general improvement of the economy (Osinubi and Amaghionyeodiwe, 2009). Therefore, it is important for a country to analyze factors that may be responsible for attracting inward foreign direct investment.
The arrival of the 21st century has made the world become a global village thereby presenting countries with the opportunity of accessing most of the factors necessary for production. On this note, there is need to go beyond understanding the economic determinants of foreign direct investment (FDI) to analyzing the institutional determinants of FDI (Subasat & Bellos, 2013). According to Dunning (2002), institutional factors are taking the lead as major determinants of foreign direct investment especially with regard to developing economies. One of such factors is the notion of corruption. Since the pioneering study by Rose-Ackerman (1975), the concept of corruption as it affects the inflow of FDI has increasingly been researched (Quazi 2014; Wu, 2006 and Habib & Zurawicki, 2002).
According to the Transparency International (2012), corruption is defined as the ‘abuse of public office for private gain’. This definition though adopted by many scholars does not agree with the views of others. Robertson, Gilley & Crittenden (2008) suggest that corruption is somewhat ambiguous. This is because there are differences in opinions among many cultures and nations of what is morally and legally right and wrong (Smarzynska & Wei, 2000 and Wines & Napier, 1992). This has led to the rise of two dominant views regarding the influence of corruption on the flow of foreign direct investment. The prevailing ‘grabbing hand’ or ‘sand the wheels’ view on the one hand, affirms that corruption does not promote activities of foreign direct investment. This is because it among other reasons increases the cost of doing business in the host country and does not offer a fair playing ground for multinational enterprises (MNE’s) to compete thereby favouring the local firms in the host country. On the other hand, the ‘helping hand’ or ‘grease the wheels’ view suggest that corruption can be used as a means to facilitate decision making processes and measure up for bad governance and ineffective institutions hence, encouraging the activities of foreign direct investment (Quazi, 2014; Subasat & Bellos, 2012; Egger & Winner, 2005).
The Nigerian economy is characterized by a number of factors that make it stand out in the African continent. With several factors like the abundance of human and natural resources, favourable climate, cheap labour and a large market base, Nigeria, also known as the ‘Giant of Africa’ possesses a high competitive advantage as compared to other African nations (Osinubi & Amaghionyeodiwe, 2009). However, despite these advantages, the insecurity and corruption issues in the country pose a huge threat to the inflow of foreign direct investment. According to Oba and Onuoha (2013) the corruption and the insecurity situation in Nigeria to a large extent has a part to play in determining the total level of investment the country is able to attract. As scholars continue to delve into this area of research, there is a seeming consensus that the issue of corruption tends to be more pronounced in developing economies and more specifically the African continent (Ardiyanto, 2012; Egger & Winner, 2005 and Habib & Zurawicki, 2002). While there is an abundance of research on the relationship between corruption and foreign direct investment, little attention has been given to the relationship of the factors under study in Nigeria. According to the corruption perception index (CPI) of Transparency International, Nigeria is rated as one of the most corrupt countries in the world. Therefore, this study aims at adding to the body of literature available on this subject matter as well as providing a reliable and more up to date conclusion on the effect of corruption on inward foreign direct investment in Nigeria.
‘ To identify the relationship between corruption and foreign direct investment in the recent Nigerian economy.
‘ To determine the strength of relationship between foreign direct investment and corruption.
‘ To propose possible recommendations on ways of increasing the inflow of foreign direct investment in Nigeria.
‘ Given the recent Nigerian economy, is there any relationship between corruption and foreign direct investment’? Does corruption have a weak or strong relationship on foreign direct investment’? Are there possible recommendations that can be offered to improve the inflow of foreign direct investment in Nigeria?
The Nigerian investment environment has been analyzed with regards to several other factors such as gross domestic product, inflation, natural resources, exchange rates, quality of infrastructure and so on. Little attention has been paid to the place of institutional factors such as corruption, democracy and political stability as they affect foreign direct investment. Though minimal literature exists in this area, more research is necessary to understand the relationship these factors have on foreign direct investment. This research is significant on a number of grounds. First of all, it will offer an articulate and more contemporary view on the relationship between corruption and insecurity issues in Nigeria and inward FDI. Secondly, the possible recommendations which will emanate from the study may form a functional framework for enhancing investment activities within the country. Lastly, this research is expected to add to the body of existing literature and act as a stepping stone for future academic research.

Since the seminal work of Rose-Ackerman (1975), there has been an upsurge in the literature regarding the impact corruption has on foreign direct investment (FDI). Over the years, several scholars have arrived at varying conclusions as to the possible effect of corruption on FDI. While majority have found a negative relationship between corruption and FDI implying that corruption deters the inflow of FDI, others have discovered a positive relationship between both variables meaning the prevalence of corruption in a country will enhance the level of FDI such a country is able to attract. However, a few other scholars have found no relationship between both variables (Subasat & Bellos, 2013; Biglaiser & Staats, 2011; Biglaiser & Derouen, 2006; Cazurra, 2006 and Wheeler & Mody, 1992). These different results have led to the development of two opposing views namely; the ‘grabbing hand’ or ‘sand the wheels’ view and the ‘helping hand’ or ‘grease the wheels’ view. Several researches by various scholars abound in order to support these views. Azam and Ahmad (2013), in their study of the influence of corruption on FDI in Least Developed Countries (LDCs) discover that a 1% point increase in the corruption index will lead to a 3.23% point decrease of FDI in LDCs. Likewise, the result of Al-Sadig (2009) from the analysis of panel data covering a twenty year period (1984’2004) from 117 host countries revealed that using an econometric method a one-point increase in the corruption level leads to a decrease in per capita FDI inflows by about 11%. The work of Helmy (2013) establishes that corruption does not reduce the level of FDI in the Middle East and North Africa (MENA) regions. Nevertheless, a recommendation was offered that corruption should be dealt with such that the future activities of FDI are not hampered.
According to Subasat and Bellos (2013), recent studies on the influence of corruption in FDI tend to adopt the helping hand and grease the wheels view. In their study, Subasat and Bellos (2012) discover that corruption does not impede FDI activities but rather serves as a pull factor for several transition economies. This view is further supported by Ardiyanto (2012) who postulates that there is a positive association between corruption and the rate of FDI in developing economies. The issue of what prompts FDI to go where it does despite the presence of corruption has also been analyzed from a different perspective by Cazurra (2006). His analysis shows that corrupt source countries will most often carry out FDI in host countries that have a high level of corruption. According to him, ‘this suggest that investors who have been exposed to bribery at home may not be deterred by corruption abroad, but instead seek countries where corruption is prevalent’ (p. 807).
Based on the corruption perception index of the Transparency International (2013), Nigeria has been identified as one of the countries with a high level of corruption. The issue of corruption in Nigeria can be carried out in various forms and at different institutional hierarchies. For example, the year 2005 witnessed the case of a certain governor who was found guilty of stealing millions of dollars that were to be used for the economic development of the state for his personal gratification. Similarly, corruption was found to be prevalent even in the financial institutions which led to the termination of appointment of the directors of five banks. This was due to the mismanagement of funds that greatly affected the health of the country’s banking sector in 2009 (Al jazeera and BBC NEWS, Africa). Based on this it is possible for a potential investor to conclude that the nature of the investment environment is very unstable and hence, may be discouraged from investing in the country. However, Cazurra (2006) ponders why countries like China and Nigeria which have been identified as countries with high level of corruption still attract a huge amount of FDI. This led him to the conclusion that corruption does not discourage the activities of FDI in every corrupt country. In the same vein, Asiedu and Lien (2011) state that the abundance of natural resources in a country can buffer the effect of possible barriers to FDI such as political instability, insecurity and corruption.
Since Nigeria being a country with high level of corruption which is heavily endowed with a number of natural resources as well as other factors that may attract potential investors, this study seeks to discover if the corruption and insecurity issues in the country is a menace or a catalyst of foreign direct investment.

This study will adopt the quantitative analysis of secondary data. Given the time frame for this research, it is necessary that the researcher utilizes secondary data because this will save time that would have been used in the data collection period of primary data and apportion more time to data analysis and other segments of the study. It will also offer easy accessibility to information through several means as well as reduce cost that might have been associated with gathering primary data.
Data to be analyzed in this study shall be derived from several sources. The researcher will make use of books, academic journals and hosts of information derived from several economic and standard setting organizations to boost the review of relevant literature and data analysis. Also, data shall be derived from professional organizations such as the World Development Indicators (WDI), Transparency International (TI), Worldwide Governance Indicators (WGI), Africa Development Indicators (ADI), International Monetary Fund (IMF) and the United Nations Conference on Trade and Development (UNCTAD). These sources of data provide reliable country specific statistical data that will be analyzed in this study. While most of these sources offer free access to data other sources such as the Transparency International may require access from the organization.
Using a simple regression model, this study will analyze the relationship between foreign direct investment and corruption. This model presents foreign direct investment (dependent variable) as a function of corruption (independent variable). This analytical tool will provide answers to research question one and two by disclosing the relationship and strength of the relationship between foreign direct investment and corruption. The study is anticipates corruption to have a strong positive relationship on foreign direct investment. That is to say an increase in the level of corruption will lead to a corresponding increase in the level of inward foreign direct investment. This result if obtained will support the ‘helping hand’ or ‘grease the wheels’ view of the impact of corruption of foreign direct investment.

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