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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
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of International
Journal (2006)37,807-822
© 2006 AcademyofInternationalBusiness Allrightsreserved0047-2506

Who cares about corruption?

AlvaroCuervo-Cazurra Abstract
This paper examines the impact of corruptionon foreign direct investment
of South
MooreSchoolof Business,University (FDI).Itarguesthat corruptionresultsnot only in a reductionin FDI,but also in
Carolina,Columbia,SouthCarolina,USA a change in the composition of country of origin of FDI.It presentstwo key
findings.First,corruptionresultsin relativelylowerFDIfromcountriesthat have
Correspondence:A Cuervo-Cazurra,Sonoco signed the Organization for Economic Cooperation and Development
InternationalBusiness Department, Moore Conventionon Combating Briberyof ForeignPublicOfficialsin International
School of Business, Universityof South
BusinessTransactions.Thissuggests that lawsagainstbriberyabroadmay act as
Carolina,1705 College Street, Columbia,
SC 29208, USA. a deterrent against engaging in corruption in foreign countries. Second,
Tel: +1 803 777 0314; corruptionresults in relativelyhigher FDIfrom countrieswith high levels of
Fax: + 1 803 777 3609; 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

Keywords:corruption; international
foreigndirectinvestment; management

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;
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
Received: 24 August 2005
Revised: 15 April2006 country of origin of FDI. We suggest that not all foreign investors
Accepted: 17 April2006 care about corruption in the host country. Although corruption has
Online publication date: 14 September 2006 a negative impact on FDI because of the additional uncertainty and
Who cares about corruption? AlvaroCuervo-Cazurra

costs, such costs vary depending on the country of that would otherwise occur with more difficulty, if
origin of the FDI.We discuss two such cases: (1) FDI at all (Huntington, 1968; Leff, 1989). Corruption is
from countries that have signed the Organization a way to bring market procedures into an environ-
for Economic Cooperation and Development ment of excessive or misguided regulation, intro-
(OECD) Convention on Combating Bribery of ducing competition into what is otherwise a
Foreign Public Officials in International Business monopolistic setting (Leff, 1989). Corruption
Transactions and (2) FDI from countries with high enables free markets to emerge in situations of
levels of corruption. We analyze the impact of limited freedom. Investors who value time or access
corruption on FDI from these two sets of countries to an input more than others will pay more for it
in comparison with FDI from a third set of (Lui, 1985).
countries: those that have low levels of corruption However, many scholars have a negative view of
and have not signed the OECD Convention. corruption, because it is rarely restricted to areas
Our results show that the relationship between where it may increase welfare. These scholars see
corruption and FDI is modified by the country of corruption as 'sand in the wheels of commerce',
origin of the FDI. Corruption in the host country indicating that corruption results in the wasteful
results in relatively less FDI from countries that use of resources devoted to corruption as well as to
have signed the OECD Convention, but in rela- fighting it. These resources could be invested more
tively more FDI from countries with high levels of profitably in other ways (Kaufmann, 1997). More-
corruption. The outcome of these two effects is that over, the payment of a bribe does not ensure that
countries with high corruption receive less FDI the promised goods are delivered. Investors do not
from countries with laws against bribery abroad, have recourse in the courts to demand fulfillment
which are the largest sources of FDI, and more FDI of the agreement, as bribery is illegal. Even when
from other countries with high corruption levels. the bribe results in fulfillment of the promise, the
firm faces increased costs (Shleifer and Vishny,
Two views of corruption 1993). The official can withhold approval of a
Corruption refersto the exercise of public power for permit until a bribe is paid, thus increasing the cost
private gain. We focus on public corruption or to the firm. Moreover, government officials have an
corruption in government, whereby a public incentive to create additional regulations with the
employee, elected or not, uses his or her position sole purpose of generating an opportunity for more
in government in order to obtain private benefits. bribes (De Soto, 1989). Corruption also results in
The existence of corruption indicates a lack of the inefficient allocation of resources towards areas
respect for the rules and regulations that govern that are more prone to bribe payment (Mauro,
economic interactions in a given society. It repre- 1998).
sents the need to make additional, irregular
payments to get things done (Kaufmann et al., Impact of host-country corruption on FDI
2003). A great deal of researchon the relationship between
There are incentives for corruption whenever an host-country corruption and FDI has found a
official has discretion over the distribution of a negative relationship between the two. Mauro's
good or the 'avoidance of a bad' to the private (1995) analysis of the institutional characteristicsof
sector (Rose-Ackerman, 1999). The official has an 67 countries found that corruption reduced overall
incentive to ask for a bribe to increase his or her investment in the country. Wei (2000a) analyzed
income in exchange for a good that has little cost to bilateral FDI from 12 developed countries to 45
him or her (Shleifer and Vishny, 1993). The firm has destination countries and found that corruption
an incentive to offer a bribe and obtain benefits to had a negative impact on FDI. Wei (2000b)
which it would not otherwise have access, such as confirmed the negative relationship between cor-
being granted a contract without competitive ruption in the host country and FDI after taking
tender. into account government policies towards FDI.
There are two views of corruption, one positive Smarzynskaand Wei (2000) found that corruption
and the other negative. Although corruption is had a negative impact on foreign investment in 22
rarely justified on ethical grounds, some scholars Eastern European countries. Habib and Zurawicki
view corruption in positive terms as 'grease in the (2002) analyzed bilateral FDI flows from seven
wheels of commerce'. Corruption is seen as facil- developed countries to 89 countries and found that
itating transactions and speeding up procedures both the level of corruption in the host country and

Journal of International Business Studies

Who cares about corruption? AlvaroCuervo-Cazurra

the absolute difference between the level of corrup- by foreign investors. Such legislation is likely to
tion in the host country and in the home country increase the cost of engaging in bribery abroad for
had a negative impact on FDI.Voyer and Beamish's investors from these countries. The benefits of
(2004) analysis of Japanese FDI found that corrup- paying a bribe to a foreign official may not be
tion had a negative impact on FDI per capita, worth the cost when the foreign investor takes into
especially in developing nations. account not only the cost of the bribe but also the
However, not all empirical studies have observed cost of the penalties, and the cost of the damage to
a negative relationship. For example, Wheeler and its image. Such a cost may alter the investor's
Mody (1992) found no relationship between risk, perception that it is appropriate to bribe foreign
which includes corruption, and foreign investment officials to secure contracts. At the same time,
by US firms. Hines (1995) analyzed US FDI, and his managers can use the existence of such legislation
results showed that corruption in the host country as a signal that their hands are tied, reducing the
did not affect the level of total inward FDI, demand for bribes from foreign officials (Elliot,
although it had a negative impact on the growth 1997: 205). As a result, these investors may reduce
of FDI after the passage of the Foreign Corrupt their FDI into countries with high corruption,
Practices Act (FCPA)of 1977. Henisz (2000) found although they may not avoid these countries
that, for US firms, corruption tends not to affect altogether.
their investments, and in some cases it increases The first country to have such laws was the US. In
the probability of investing in the foreign country. an effort to clean up the image of US firms and their
use of bribery, the FCPAwas passed in 1977. This
Variationon the sensitivityof FDIto host-country law requires strict accountability of payments,
corruption making it possible to prosecute US firms and
We argue that not all investors are equal. The individuals for bribing government officials abroad
sensitivity of FDI to host-country corruption is (Kaikati and Label, 1980; Hines, 1995). The FCPA
established three main requisites: accurate record-
likely to vary with the country of origin of the FDI.
This line of thinking has yet to be thoroughly keeping; effective internal accounting control sys-
tems; and prohibition of corrupt payment to
explored in the literature. Below we discuss how the
characteristics of the country of origin of FDI foreign officials, politicians, and political candi-
influence the cost of engaging, and incentives to 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
engage, in bribery and, as a result, the sensitivity of
FDI to host-country corruption. Figure 1 illustrates 5-year prison term for an employee (US Congress,
the relationships among the key constructs. We 1977). It made illegal not only direct payments to
discuss two characteristics of the home country foreign officials or politicians, but also payments to
that affect this sensitivity: the existence of laws other individuals - facilitating agents - who bribe
on the firm's behalf. However, the FCPA was
against bribery abroad, and the existence of high
levels of corruption. explicit in not penalizing 'grease payments', or
payments to foreign officials to expedite processes
that would otherwise occur without a bribe, albeit
Sensitivityof FDIfrom countrieswith laws against more slowly.
briberyabroad to host-countrycorruption It is not clear that the FCPAhas been effective in
Some countries have implemented laws against
deterring US investments in corrupt countries.
bribery abroad in order to limit the supply of bribes Hines (1995) found support for this deterrence
effect, as US firms reduced the growth of invest-
ments in FDI, capital-labor ratios, joint venture
Home countrywith
laws againstbribery activity, and aircraft exports to countries with high
abroad corruption after the passage of the Act. However,
Wei (2000a) found no such support: his data
Host country DI suggested that US investors did not have lower
FDI stocks in corrupt countries than investors from
other developed countries; all of them were
Home countrywith
negatively affected by corruption in the same way.
high corruption
There are two possible explanations for these
Figure 1 Theoreticalframework. conflicting results (Tanzi, 1998). One is that US

Journal of International Business Studies

Who cares about corruption? Alvaro

investors had an incentive to bypass the FCPAto incentives to bypass the legislation. Additionally,
avoid losing competitiveness in the allocation of the periodic evaluation of the progress in the
contracts abroad to competitors from other foreign application of the Convention may create social
countries. Another is that the US government was sanctions that improve enforcement. Governments
not forceful in prosecuting bribery abroad, espe- that do not make adequate progress towards the
cially in 'friendly' countries. This changed in the prosecution of corruption may be pressured by
mid-1990s thanks to the convergence of several governments that fulfill their obligations.
trends (Tanzi, 1998). First, the end of the Cold War Therefore we argue that corruption may further
reduced the need to turn a blind eye to corruption discourage FDIfrom countries that have signed the
in friendly countries. Second, the spread of democ- OECD Convention and have developed laws
racy and freedom of the press exposed bribery that against bribery abroad. The Convention increases
used to be hidden, especially in centralized econo- not only the potential costs of bribing foreign
mies. Third, non-governmental institutions, such officials by creating penalties, but also the effective
as Transparency International, took an active role costs by increasing the probability of detection
in denouncing corruption. Fourth, international through the mutual monitoring mechanism. Such
institutions, such as the World Bank and Interna- an increase in costs may alter the incentives to
tional Monetary Fund, started demanding better invest in countries with corruption where investors
governance in development projects. Finally, inter- will be asked for bribes. Therefore we hypothesize
national organizations, such as the OECD, took an that:
active role in promoting the reduction of bribery.
We explore this last point in more detail. Hypothesis 1: In comparison with FDI from
On 21 November 1997 the 30 members of the other countries, the relationship between host-
OECD,and an additional five non-members, signed country corruption and FDI is negative for FDI
the Convention on Combating Bribery of Foreign from countries with laws against bribery abroad.
Public Officials in International Business Transac-
tions. The Convention, which came into effect on Sensitivityof FDIfrom countrieswith high
15 February1999, established a general framework corruptionto host-countrycorruption
that criminalizes bribery of foreign officials to Some FDI comes from countries with high levels of
provide the firm with an improper advantage corruption. These investors operate in countries
(OECD, 1997). The Convention prohibits bribing where the payment of bribes is a normal way of
not only of government officials but also of officials doing business. As a result, they are likely to have
of public international organizations. It requires developed experience on how best to engage in
signatory countries to modify their laws to make bribery to be able to operate in their home country.
illegal the bribery of foreign officials, to provide Thus, when these investors internationalize, they
mutual legal assistance in investigations, and to may not be deterred by host-country corruption,
allow for extraditions. Additionally, the Conven- unlike other investors, and they may even be
tion requires stricter accounting standards, external attracted by it for two reasons. First, they would
auditing, and internal controls in national laws. A face lower costs of doing business abroad than
companion agreement disqualifies bribes from dealing with corruption in the host country
being tax-deductible business expenses (OECD, represents. Second, they may even select countries
1996). The Convention establishes a systematic with high levels of corruption because of the
mechanism for monitoring of the implementation similarities in institutional conditions to their
of the Convention's standards by each signatory country of origin.
country. The OECD'sWorking Group on Briberyin Internationalization requires dealing with addi-
International Business Transactions periodically tional costs of doing business abroad (Hymer, 1976)
evaluates and publicizes progress made in the or a liability of foreignness (Zaheer, 1995). Some of
adaptation of national laws towards the standards these costs involve dealing with corruption in the
set by the Convention and in the enforcement of host country (Calhoun, 2002). We can distinguish
such laws. This mutual monitoring mechanism two sets of such costs: the costs of changing
addresses some of the limitations of the FCPA.It attitudes regarding the use of bribes abroad, and
establishes the same ethical requirements of con- the costs of knowing how to bribe abroad. First,
duct for all foreign investors, thus leveling the corruption requires managers to alter their assump-
playing field among competitors and reducing tions regarding the way in which one establishes

Journalof InternationalBusinessStudies
Who cares about corruption? Alvaro

and maintains business transactions. Managers process, because they are likely to already know
must change their belief in contracts and the how best to deal with it.
rule of law as the accepted way and instead FDIfrom countries with high corruption may not
accept illegal payments as the way to conduct only be undeterred by host-country corruption, but
business abroad. However, it is difficult to change may even be attracted by it. Investors from
such deep-seated attitudes and beliefs about the countries with high corruption face lower costs of
ways in which business is conducted (Prahaladand doing business abroad when they enter other
Bettis, 1986), particularly when the firm expands countries with high corruption. The similarities in
abroad (e.g., Johanson and Vahlne, 1977; Eriksson the conditions of the institutional environment
et al., 1997). induce these investors to focus their FDIthere. This
Second, it is costly to develop expertise on how to argument builds on the ideas discussed in the
best deal with bribery in the host country because incremental internationalization process or
there are no visible guides or consulting firms that Uppsala model (Johanson and Wiedersheim-Paul,
can provide knowledge about how to bribe success- 1975; Johanson and Vahlne, 1977). This model
fully; its illegal nature precludes such services. explains the selection of countries in which to
Engaging in corruption requires an understanding internationalize based on the concept of 'psychic
of the subtleties involved in offering a bribe owing distance' between the home and host countries
to the illegal nature of the offer; simply offering a (Johanson and Wiedersheim-Paul, 1975). Psychic
bribe, not just the payment thereof, is a criminal distance is the difference between countries in
offence. In addition to being illegal, corruption is terms of language, culture, education, business
opaque: it requires secrecy to be effective (Shleifer practices, industrial development, and regulations,
and Vishny, 1993). Thus, engaging in bribery all of which may limit the transfer of information.
requires an understanding of the subtleties This distance reduces the ability of the firm, and
involved in payment of bribes in the host country. particularly of its managers, to understand foreign
In some cases, it may be difficult to separate the information. As a result, the firm first expands into
cultural norms of gift exchange from bribery countries that are close to the host country in terms
(Donaldson, 1996). of psychic distance, and only later enters countries
A company may use joint ventures or managers that are more distant. The current paper focuses not
with experience in bribery to deal with the on the order of investment, but rather on the idea
payment of bribes abroad. These actions would that investors from countries with high corruption
reduce the costs of learning how to bribe in the will seek other countries with corruption. Hence we
country. However, the firm will still, and first, have hypothesize that:
to incur the cost of changing the assumptions of
managers at headquarters about corruption, and Hypothesis 2: In comparison with FDI from
accept bribery as a valid way of doing business. other countries, the relationship between host-
Additionally, the firm will have to incur the country corruption and FDI is positive for FDI
additional costs of finding and monitoring the from countries with high corruption.
local partner or manager so that they do not extract
rents from the company while they bribe others. Research design
In contrast, those investors who have experi- We test the hypotheses using data on bilateral FDI
enced corruption at home are likely to have already inflows from 183 home economies to 106 host
altered their beliefs about bribery as an accepted economies. By including such a large number of
way of doing business and to have mastered the home countries, we are able to analyze how the
subtleties of how to deal with bribery. As a result, relationship between corruption and FDI varies
when they enter other countries with high levels of depending on the characteristics of the country of
corruption, the costs of engaging in bribery are origin of FDI. Previous studies of the impact of
lower. For firms whose managers have already corruption on FDI have analyzed FDI either from
learned through experience, the cost of internatio- one country only, or from a limited number of
nalization is lower (Eriksson et al., 1997). These home countries, usually developed or OECD coun-
investors are accustomed to paying bribes in order tries, which tend to have low corruption. In
to secure permits and win contracts at home (Ades contrast to these studies, we use a large number of
and Di Tella, 1997): thus they may be undeterred by host countries to be able to compare countries with
the illegality, opacity and uncertainty in the bribery laws against bribery abroad and countries with high

journalof InternationalBusinessStudies
Who cares about corruption? AlvaroCuervo-Cazurra

levels of corruption with other countries that do FDI.We then introduced interaction terms between
not have such characteristics. host-country corruption and dummy indicators of
The bulk of FDI data comes from the United the type of country of origin of the FDI (countries
Nations Conference on Trade and Development with laws against bribery abroad, and countries
(UNCTAD)country profiles (UNCTAD,2005). This with high corruption levels). These interactions
database provides the widest coverage of bilateral capture the additional influence of corruption on
FDI inflows available. We complemented this FDI associated with countries with such character-
database with information on FDI from the OECD istics in relationship to countries that do not have
(2004), which has been a common source of data in them: that is, countries that have low corruption
other studies. We included all the countries for and do not have laws against bribery abroad. To test
which we have data. The list of countries appearsin these hypotheses, we then analyzed the sign and
the Appendix. significance of the coefficient of each product. We
also controlled for the country of origin of FDIwith
Variablesand measures a dummy variable to capture other influences that
Table 1 provides a summary of the variables, the country of origin has on FDI. Wei (2000a, 8)
measures, and sources of data. The dependent provides a detailed explanation of this procedure,
variable is the natural log of bilateral FDI inflows which he used to test whether US investors are
from a home country to a host country, measured more sensitive to corruption in the host country
in US$ using the average foreign exchange rate for than are investors from other developed countries.
the year. Specifically, to test Hypothesis 1, we first mea-
The independent variable of interest is host- sured countries that have laws against bribery
country corruption. We used the indicator 'control abroad using a dummy indicator that the country
of corruption' provided in Kaufmann et al. (2003). has signed the OECD Convention on Combating
Corruption is illegal and, as such, difficult to Bribery of Foreign Officials in International Busi-
measure with any degree of precision. Studies rely ness Transactions. The countries that have done so
on subjective measures of corruption: for a discus- are the 30 members of the OECD, as well as
sion of the alternative measures of corruption and Argentina, Brazil, Bulgaria, Chile, Estonia, and
how they generate similar results, see Wei (2000a). Slovenia. We multiplied this indicator by the
Kaufmann et al. (2003) created a composite mea- measure of host-country corruption. A negative
sure that integrates 31 indicators from 14 different and statistically significant coefficient of this
sources using an unobserved components model, product can be taken to provide support for
weighting indicators by their precision. This Hypothesis 1.
reduces the noise of single indicators. This compo- To test Hypothesis 2, we first measured countries
site indicator uses not only polls of experts but also with high corruption using a dummy indicator that
surveys of businesspeople or citizens in the country. the level of corruption in the home country is
Of all measures of corruption available, it has the above the average for all countries. Excluded from
widest coverage, 184 economies, which we need to this indicator were countries that have signed the
avoid constraining the database. The indicator OECD Convention but that have high levels of
measures control of corruption within an interval corruption: Argentina, Bulgaria, Mexico, and Tur-
of -2.5 (low control of corruption) to 2.5 (high key. This was done in order to avoid counting these
control of corruption). To simplify the interpreta- countries twice. We then multiplied the indicator
tion of the coefficients, we rescaled the indicator by by host-country corruption. A positive and statisti-
subtracting the original index from 2.5, such that a cally significant coefficient of this product can be
higher number indicates higher corruption and a taken to provide support for Hypothesis 2. We used
lower number indicates lower corruption. alternative indicators of high corruption (corrup-
To test Hypotheses 1 and 2 we used interaction tion above the average and half standard deviation,
terms. We are interested in understanding how the corruption above the median, corruption in the top
relationship between levels of corruption in the third, corruption in the top sixth) to check for the
host country and FDI varies depending on the robustness of this measure. The results do not
characteristics of the country of origin of the FDI. change in sign or significance.
Therefore we first introduced an indicator of host- We controlled for other variables that may affect
country corruption in the analysis. This captures the relationship between corruption and FDI
the general impact of host-country corruption on following a gravity model. The gravity model has

Journalof InternationalBusinessStudies
Who cares about corruption? AlvaroCuervo-Cazurra

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

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

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

Journalof InternationalBusinessStudies
Who cares about corruption? AlvaroCuervo-Cazurra

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

journalof InternationalBusinessStudies
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
3. Home country 0.252 0.434 -0.334*** 0.018 1
with high
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
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*
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*
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
Significance levels: +P<0.1, *P<0.05, **P<0.01, ***P<0.001.



Who cares about corruption? AlvaroCuervo-Cazurra

Results from countries with laws against bribery is further

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

low-income countries. This idea does not appear to characteristics: having laws against bribery abroad
be supported. First,in the analysis we addressedthis or having high levels of corruption. Although many
through controls. We controlled for GDP and of the countries that have laws against bribery
population of the host country in order to account abroad are high income, others are not. Similarly,
for the attractiveness of richer, more populous although many of the countries with high levels of
nations. Both controls have positive coefficients corruption are low income, others are not. The
that are statistically significant at P< 0.001. We also analysis of the sensitivity of FDI from countries
controlled for the characteristics of the country of with different levels of income to corruption in the
origin using a dummy variable for each source host country would require a separate study.
country. A second alternative explanation is that there are
Second, the analysis of the distribution of FDI capital controls biased towards some nations,
flows does not support this alternative explanation. particularly high-income nations. We controlled
To maintain consistency with the previous ana- for capital controls in our data analysis. We found
lyses, we separated countries into two groups: those that the existence of restrictions to FDI, a measure
that signed the OECD Convention, and those that that includes capital controls, has a negative
did not. First,countries that signed the Convention coefficient that is statistically significant in most
are the largest sources of FDI in the world, models.
regardless of the characteristics of the destination It is unlikely that capital controls that are biased
country. We observe that the majority of FDI flows towards all high-income nations are widespread
going into countries that signed the Convention enough to affect the results. This would require that
originate in other countries that signed the Con- a large number of countries limit FDIfrom all high-
vention (98.4%), but a similar pattern of behavior income nations, while allowing FDI from low-
appears in countries that did not sign the Conven- income nations. The reality is that limitations to
tion. The majority of FDI flowing into countries FDI from one high-income nation tend to result in
that did not sign the Convention originates in FDI coming from another high-income nation. For
countries that signed the Convention (88.4%). example, limitations to FDI from US oil firms in
Second, countries that did not sign the Convention some Middle Easternnations have resulted in large
do not concentrate their investments in other FDIby French firms. Moreover,low-income nations
countries that did not sign the Convention. may also face discriminatory controls when invest-
Instead, the majority of FDIoriginating in countries ing in high-income nations. For example, in 2005
that did not sign the Convention goes to countries the US Congress prevented the acquisition of the
that signed the Convention (68.9%). We conducted US oil firm Unocal by the Chinese oil firm CNOOC.
an additional check of the distribution of FDIflows Even in the case of regional trade and investment
because not all the countries that signed the OECD agreements that favor some countries over others,
Convention are usually considered high-income. this discrimination applies only to countries not in
The Group of 7 (G7) countries (Canada, France, the agreement, regardless of their level of income.
Germany, Italy,Japan, UK, and USA)are commonly Finally, capital controls that discriminate against a
considered the most developed in the world. particularnation are not permitted under the WTO.
Therefore, we identify high-income nations as G7 Temporary capital controls are allowed, but dis-
countries, and classify the remainder as low crimination according to country of origin is
income. Our analysis using this alternative classifi- prohibited under the most-favored-nation clause
cation confirms the previous findings. G7 countries in the General Agreement on Tradein Goods, in the
are the source of the majority of FDI flows world- Agreement on Trade-Related Investment Measures,
wide, regardless of the country of destination. The and in the General Agreement on Trade in Services.
majority of FDI flowing into G7 countries comes The WTO has 149 member countries and 32
from other G7 countries (73.7%). Similarly, the observer countries, or countries in the accession
majority of FDI flowing into non-G7 countries process. Only a reduced number of very small
comes from G7 countries (61.5%). Non-G7 coun- countries in our list of host economies are not
tries concentrate their investments in G7 countries. members or observers of the WTO. The amount of
The majority of FDI from non-G7 countries goes to FDI they receive is not large enough to bias the
G7 countries (56.7%). results.
Third, in this paper we do not separate countries A third alternative explanation is that the OECD
by level of income or development. We use other Convention on Combating Bribery of Foreign

journalof InternationalBusinessStudies
Who cares about corruption? Alvaro

Public Officials in International Business Transac- the implementation of the Convention across
tions does not have the strong impact suggested, countries, and that more detailed analyses of the
and that the variable instead captures the concen- specificlaws in each countryare necessary.
tration of FDI from OECD countries into other A fourth alternative explanation is that the
OECDcountries. As we indicated above, we control indicator of home country with high corruption
for home country and for the size of the host capturesthe influence of the differencein corrup-
country. The distribution of FDI inflows does tion scores on FDI discussed by Habib and
not support the notion that OECDcountries invest Zurawicki (2002). Their and our studies differ
only in other OECDcountries. They are the largest markedly. First,the analysis of Habib and Zurawicki
investors not only in other OECD countries, includes only developed,relativelylow-corruption
but also in non-OECD countries. countries among the seven home countries they
We conducted additional tests to analyze whether analyze (Germany,Italy,Japan, Korea,Spain, UK,
the Convention has been effective in altering the and the USA);it is a matter of empiricaltest to
sensitivity of FDI from countries that signed it to confirmthat their resultsapply to home countries
host-country corruption. To explore this, we ran an that truly have high corruption. Second, the
additional test (available upon request) comparing variables used in each study capture different
the sign and statistical significance of the coeffi- constructs.The variableused in our study - home
cient of the interaction between the indicator that country with high corruption - is an absolute
the country has signed the OECDConvention and variable. A home country is either classified as
the level of host-country corruption before and having high levels of corruption,or it is not. The
after the Convention came into force. This analysis variable used in their study - differences in
is inspired by Hines's (1995) study of the effective- corruption scores - is measured relative to
ness of the FCPA.We observe that the coefficient other countries. A country is classifiedas having
is not statistically different from zero in the higher or lower levels of corruptionthan another.
time period before the Convention came into Thesetwo variablesproducedifferentclassifications
force (years 1997 and 1998), but it becomes of countries,which are likely to result in different
negative and statistically significant (P<0.001) insights.
afterit came into force (years1999 and 2000). We
conductedan additionalanalysisthat separatesthe Discussion and conclusions
G7, all of which signed the Convention, from other In the present paper, we examined the effect of
countries that signed the OECD Convention to corruption on FDI. Corruption creates challenges
check that the previousresults are not driven by for investors, because it increases the cost of
FDI from the largest source countries, which are operating abroad, as well as the uncertainty and
also low-corruption countries. We find that the risk involved. Previous studies have argued that
coefficient of the interaction between the indicator corruption discourages FDI.However, we argue that
that the country is in the G7 and the level of host- corruption does not impact on all foreign investors
country corruption is not statistically different equally, because there is variability in the cost of
from zero in 1997, it becomesnegativeand weakly engaging in bribery abroad. Investors from coun-
statistically significant in 1998 (P<0.1), and tries that have laws against bribery abroad are likely
becomes statistically significant (P<0.001) in to further limit their FDI in countries with high
1999 and 2000. We also find that the coefficient levels of corruption. These laws increase the cost of
of the interaction between the indicator that the engaging in bribery abroad. In contrast, investors
country signed the Convention but is not in the G7 from countries with high levels of corruption
and the level of host-country corruption is positive appear not to limit their FDI in other countries
and statistically significant in 1997, becomes not that also have high levels of corruption. They have
statistically different from zero in 1998, and experienced corruption at home. As a result, they
becomes negative and statistically significant in are apparently not deterred by corruption as much
1999 (P<0.05) and in 2000 (P<0.01). We interpret as other investors. They may even seek countries
these results as support for the idea that the OECD with high corruption.
Convention has altered the sensitivity to host- These are important findings that add depth to
country corruption of investors from countries that our understanding of the impact of corruption on
signed the Convention. Nevertheless, we acknowl- FDI. Scholars need to be aware that FDI from
edge that there are variations in the effectiveness of different countries is affected differently by

journalof InternationalBusinessStudies
Who cares about corruption? AlvaroCuervo-Cazurra

host-country corruption. Corruption apparently about the sensitivity of the country of origin of FDI
further discourages FDI from countries that to host-country corruption in their analyses of the
have signed the OECD Convention, whereas it relationship between host-country corruption and
does not deter FDI from countries with FDI. This paper also hints at the usefulness of laws
high corruption. The implication of these two against bribery abroad. Although it is necessary to
findings is that corruption in the host country prosecute the demand for bribes with legislation at
not only reduces FDI, but also changes the home to reduce distortions and enable growth
composition of FDI. Consequently, a government (Shleifer and Vishny, 1993; Mauro, 1995), prosecut-
that confronts and reduces corruption in the ing the supply of bribes with laws against bribery
country is likely to be rewarded not only with abroad may also help. However, to be effective,
more FDI, but also with more FDI from countries these laws require a multilateral approach. When
that actively discourage bribery and with less FDI investors from multiple countries are subject to
from countries that have high levels of corruption. these legal constraints, government officials face
This will reinforce the efforts of the government in difficulties in extracting bribes from foreign firms.
combating corruption. Otherwise, when investors from only one country
There are several limitations to this study that are legally constrained not to pay bribes, govern-
arise from the nature of the data presented here ment officials will simply allocate contracts and
that can be addressed in future research. First, we extract bribes from firms coming from countries
do not have disaggregated data at the firm level. that do not have these legal constraints, continuing
Futureresearch can analyze firm-level data to study the vicious circle of corruption.
differences among investors (e.g., Hakkala et al., With respect to the second line of research, this
2004). Second, we have assumed a degree of paper highlights the importance of understanding
homogeneity in the industries of operation because the characteristics of the country of origin when
we do not have disaggregated data at the industry studying the internationalization of firms. This
level. Future research can explore how the char- contributes to a better understanding of the impact
acteristics of the industry affect the impact of of location on internationalization, an area that
corruption on FDI. Third, we have used available has been neglected relative to the related areas
measures indicating the level of perceived of ownership and internalization advantages
corruption in the country. However, corruption (Dunning, 1998). Future studies should take into
has various dimensions, each of which may account not only the benefits but also the costs of
have a differential impact on the investment coming from a particularlocation if we are to better
decisions of firms, as argued by Rodriguez et al. understand the selection of countries and entry
(2005). Fourth, we analyzed FDI flows captured strategies.
in national accounts. The insights generated
may not generalize to investors who do not
engage in FDI abroad but use instead other Acknowledgements
methods of internationalization, such as interna- The paper benefited from suggestions by the Guest
tional trade or contractual relationships. Future Editor Peter Rodriguez,three anonymous reviewers,
research can compare differences in the effect of the discussant Marty Meznar, Chuck Kwok, Kendall
corruption on the behavior of firms that use Roth, Annique Un, and the audience at the JIBS
alternative internationalization methods, and how Focused Issue Workshop in Phoenix, Arizona. The
these differences vary according to the country of School of Global Management and Leadership at
origin of the investors. Arizona State Universityat the West campus, Lally
Overall, the present paper contributes to two School of Management and Technology at Rensselaer
streams of research, one that studies the relation- PolytechnicInstitute,the Departmentof Economicsat
ship between corruption on FDI, and another that RensselaerPolytechnic Institute, and the Center for
analyzes the influence of the country of origin on International Business Education and Research at
the behavior of MNEs. With respect to the first Thunderbird, The Garvin School of International
line of inquiry, the paper provides a better under- Management, provided financial support for the
standing of the impact of corruption on FDI by Workshop.Fundingfrom the Center for International
highlighting differences in the sensitivity to host- BusinessEducationand Researchat the Universityof
country corruption among FDI from different South Carolinais gratefullyacknowledged. All errors
home countries. Future studies should be explicit remain mine.

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Appendix Netherlands Antilles, New Caledonia, New
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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,
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Chad, Chile, Colombia, Comoros, Costa Rica, Lanka, Sudan, Suriname, Swaziland, Sweden,
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Dominican Republic, Ecuador, El Salvador, Thailand, Trinidad and Tobago, Tunisia, Turkey,
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Gambia, Germany, Greece, Guatemala, Guyana, Ukraine, United Arab Emirates, Uruguay, US
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Mali, Mauritius, Mexico, Moldova, Mongolia,
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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? AlvaroCuervo-Cazurra

Guinea-Bissau, Hong Kong, India, Indonesia, Iran, About the author

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

Acceptedby LorraineEden,ArmyHillman, PeterRodriguez,Donald Siegeland PeterRodriguez,GuestEditors,17 April2006. Thispaper has been with the
author for two revisions.

Journalof InternationalBusinessStudies