Who Cares about Corruption? Author(s): Alvaro Cuervo-Cazurra 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: 07/06/2011 05:46
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Business Studies of 37, (2006) 807-822 Journal International

Business All of rightsreserved0047-2506 2006 Academy International www.jibs.net

Who

cares

about

corruption?
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 fromcountriesthat have lowerFDI resultsin relatively corruption findings.First, the Organization for Economic Cooperation and Development signed of Conventionon Combating Bribery ForeignPublicOfficialsin International abroadmay act as This Transactions. suggests that lawsagainstbribery Business in corruption in foreign countries. Second, a deterrent against engaging 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. Studies Business of (2006) 37, 807-822. Journal International 10. doi: 1057/palgrave.jibs.8400223 international direct investment; management foreign Keywords:corruption;

AlvaroCuervo-Cazurra
of MooreSchoolof Business, University South USA SouthCarolina, Columbia, Carolina, Sonoco Correspondence:A Cuervo-Cazurra, 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

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

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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 relatively 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. 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 represents 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 facilitating transactions and speeding up procedures

Two views of corruption

that would otherwise occur with more difficulty, if at all (Huntington, 1968; Leff, 1989). Corruption is a way to bring market procedures into an environment of excessive or misguided regulation, introducing 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). Moreover, 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). 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 corruption 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

Impact of host-country corruption on FDI

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809

the absolute difference between the level of corruption 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 corruption 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.

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.

Variationon the sensitivityof FDIto host-country corruption

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 recordkeeping; effective internal accounting control systems; and prohibition of corrupt payment to foreign officials, politicians, and political candidates. 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

Some countries have implemented laws against bribery abroad in order to limit the supply of bribes

from countrieswith laws against Sensitivityof FDI abroad to host-countrycorruption bribery

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 investments 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

Home countrywith laws againstbribery abroad Hypothesis Host country corruption 1I

DI

Hypothesis2 Home countrywith high corruption

Figure 1 Theoreticalframework.

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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, especially 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 democracy and freedom of the press exposed bribery that used to be hidden, especially in centralized economies. Third, non-governmental institutions, such as Transparency International, took an active role in denouncing corruption. Fourth, international institutions, such as the World Bank and International Monetary Fund, started demanding better governance in development projects. Finally, international 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 Transactions. 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 Convention 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 conduct for all foreign investors, thus leveling the playing field among competitors and reducing

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 hostcountry corruption and FDI is negative for FDI from countries with laws against bribery abroad.

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 additional 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 assumptions regarding the way in which one establishes

Sensitivityof FDIfrom countrieswith high corruptionto host-countrycorruption

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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 successfully; 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 experienced 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 internationalization 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

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 hostcountry corruption and FDI is positive for FDI from countries with high corruption. 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 countries, 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

Research design

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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 hostcountry 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 discussion of the alternative measures of corruption and how they generate similar results, see Wei (2000a). Kaufmann et al. (2003) created a composite measure 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 composite 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 interpretation 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 hostcountry corruption in the analysis. This captures the general impact of host-country corruption on

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 characteristics 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 measured 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 Business 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 Turkey. This was done in order to avoid counting these countries twice. We then multiplied the indicator by host-country corruption. A positive and statistically significant coefficient of this product can be taken to provide support for Hypothesis 2. We used alternative indicators of high corruption (corruption 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

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Table 1 Variables,measures, and sources of data Variable Dependent variable Ln FDIinflows Measure Natural log of FDIinflows into the country in the year in US$ Indicatoron the level of corruptionin the host country, from 0 (low) to 5 (high) (2.5 minus the original score for control of corruption) Dummy indicator that the home country has signed the OECDConvention on Combating Briberyof Foreign Officialsin International BusinessTransactions,1 or 0 Dummy indicator that the level of corruption in the home country is above the average for all countries (2.5), 1 or 0. We exclude countries that have laws against bribery abroad. Source UNCTAD(2005) or OECD(2004)

Independent variable of interest

Host country corruption Home country with laws against briberyabroad

Home country with high corruption

Constructed using data from aggregate governance indicatorsdatabase, Kaufmannet al. (2003) Constructed using the list of signatory countries of the OECDConvention on Combating Briberyof Foreign Officials in InternationalBusinessTransactions from OECD(2005) Constructed using data from aggregate governance indicatorsdatabase, Kaufmannet al. (2003)

Control variables

Ln GDP

Natural log of gross domestic product in power purchasing parity in US$ Number of inhabitants in the country, in Population millions Natural log of the greater circle distance Ln Distance between the centers of the home and host country in miles Indicatorthat the none, one, or both home Landlocked and host countries are landlocked, 0, 1, or 2 Indicatorthat the none, one, or both home Island 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 Indicatorsof trade policy, from 1 (very low Restrictionson barriersto trade) to 5 (very high barriersto trade 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 to particular the impactof corruptionon FDI(e.g., Wei, 2000a).The theoreticalbasisis the proximityconcentration hypothesis (Horstmann and 1993).Thisidea extends 1992;Brainard, Markusen,

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.

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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 generating 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). Therefore, 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 complemented by indicators of whether the country is landlocked or an island, as these characteristics affect the difficulty in transporting products, and therefore 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 similarities 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 administration 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 administrative 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

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).

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 development. 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 independent 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.

Method of analysis

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Table 2
Variable 1. 2.

Summary statistics and correlationmatrix

Mean 2.230 2.500 0.252 Std. dev. 3.424 1.000 0.434 1 1 -0.327*** -0.334*** 2 3 4 5 6 7 8 9 10

Ln FDI inflows

Host-country corruption 3. Home country with high corruption 4. Home country with laws against bribery abroad 5. Ln GDP 6. Population 7. Ln Distance 8. Landlocked 9. Island 10. Common border 11. Common 12. 13. 14. 15.
0

1 0.018 1

0.546

0.497

0.350***

-0.037+

-0.628***

18.628 32.676 7.858 0.328 0.253 0.059 0.155 0.046 0.042 2.389 2.681

1.928 52.456 0.997 0.531 0.476 0.236 0.362 0.210 0.200 0.689 1.138

0.437*** 0.291*** -0.108*** -0.200*** -0.033 0.092*** 0.060* -0.053* 0.124*** -0.252*** -0.139***

-0.480*** -0.161*** 0.068*** 0.215*** -0.146*** 0.010 0.064** 0.131** -0.030 0.450*** 0.496***

0.025+ 0.030* -0.042* 0.011 -0.080*** 0.115*** 0.108*** 0.140*** -0.025 0.017 -0.079***

-0.040 -0.048** -0.053** 0.040* -0.136*** -0.004 -0.083*** -0.116*** 0.079*** -0.041* 0.047*

0.733*** 0.060** -0.325*** 0.059** 0.010 -0.135*** -0.164*** 0.004 -0.158*** -0.201**

1 0.188*** -0.193*** 0.080*** -0.005 -0.057** -0.085*** 0.003 0.081** 0.007

1 -0.205*** 0.276*** -0.440*** -0.134*** -0.105 -0.037* 0.090*** 0.063**

1 -0.174*** 0.092*** -0.010 0.097*** -0.062** 0.229*** 0.033*

1 -0.130*** 0.003 -0.050** -0.044* 0.026 -0.087***

0.220*

language Common colony Ever colonial link Restrictions on FDI Restrictions on trade

0.125*

0.145* 0.008 0.028

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

3 =3

ou

c
Lei

Who cares about corruption? 816

Alvaro Cuervo-Cazurra

Results
Table 2 presents the summary statistics and correlation 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 correlation 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 coefficient 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

from countries with laws against bribery is further 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 statistically 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 discussion, 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

of Table 3 Resultsof the analyses of the change in the relationshipbetween corruptionand FDIdepending on the characteristics the country of origin of FDI Dependent variable:Ln FDIinflows Model 1 Home country with laws against bribery abroad x host-country corruption Home county with high corruptionx host-country corruption Host-countrycorruption Ln GDP Population Ln Distance Landlocked Island Common border Common language Common colony Evercolonial link Restrictionson FDI Restrictionson trade Intercept
z2

Model 2 -0.575*** (0.129)

Model 3

Model 4 -0.323* (0.162)

0.707*** (0.181) -0.345*** (0.081) 0.480*** (0.067) 0.008*** (0.001) -0.833*** (0.089) -0.039 (0.190) -0.479t (0.250) 0.709* (0.292) 0.542* (0.226) -0.197 (0.510) 0.714* (0.320) -0.218t (0.125) 0.027 (0.072) 4.843*** (1.515) 1073.09*** 0.228 -1881.762 0.078 (0.124) 0.493*** (0.066) 0.008*** (0.001) -0.725*** (0.091) -0.089 (0.188) -0.545* (0.247) 0.623* (0.289) 0.602** (0.223) -0.261 (0.503) 0.752* (0.316) -0.209t (0.124) 0.031 (0.071) 4.037** (1.506) 1092.42*** 0.232 -1802.099 -0.443*** (0.084) 0.464*** (0.066) 0.009*** (0.001) -0.799*** (0.090) -0.088 (0.189) -0.488* (0.249) 0.529t (0.294) 0.581* (0.226) -0.307 (0.507) 0.672* (0.321) -0.253* (0.125) 0.031 (0.072) 5.144*** (1.510) 1079.68*** 0.232 -1778.227

0.460* (0.219) -0.170 (0.160) 0.473*** (0.066) 0.008*** (0.001) -0.756*** (0.092) -0.112 (0.189) -0.515* (0.249) 0.543t (0.293) 0.602** (0.226) -0.281 (0.506) 0.676* (0.320) -0.244t (0.125) 0.030 (0.072) 4.719** (1.519) 1083.64*** 0.233 -1776.249

Pseudo R2 Log likelihood

Theanalyses havesourcecountry here. dummies thatarenot reported

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

of Business Studies Journal International

Who cares about corruption?

Alvaro Cuervo-Cazurra 817

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 analyses, 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 Convention (98.4%), but a similar pattern of behavior appears in countries that did not sign the Convention. 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 classification confirms the previous findings. G7 countries are the source of the majority of FDI flows worldwide, 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 countries 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

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 highincome nations, while allowing FDI from lowincome 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 investing 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 discrimination 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

Studies Business journalof International

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Alvaro Cuervo-Cazurra

Public Officials in International Business Transactions does not have the strong impact suggested, and that the variable instead captures the concentration 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 coefficient 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 effectiveness 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

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 corruption scores on FDI discussed by Habib and Zurawicki (2002). Their and our studies differ markedly. First,the analysis of Habib and Zurawicki countries among the seven home countries they

includes only developed,relativelylow-corruption

negative and statistically significant (P<0.001) afterit came into force (years1999 and 2000). We conductedan additionalanalysisthat separates the
G7, all of which signed the Convention, from other countries that signed the OECD Convention to

Italy,Japan, Korea,Spain, UK, analyze (Germany, 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 variables producedifferentclassifications 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 countries 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

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 hostcountry corruption is not statistically different

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-

from zero in 1997, it becomesnegativeand weakly

country corruption of investors from countries that signed the Convention. Nevertheless, we acknowledge that there are variations in the effectiveness of

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819

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 characteristics 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 international 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 relationship 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 understanding of the impact of corruption on FDI by highlighting differences in the sensitivity to hostcountry corruption among FDI from different home countries. Future studies should be explicit

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), prosecuting 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, government 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.

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Homecountries

Afghanistan, Albania, Algeria, Andorra, Angola, Anguilla, Antigua Barbuda, Argentina, Armenia, Aruba, Australia, Austria, Azerbaijan, Bahamas, Bahrain, Bangladesh, Barbados, Belarus, Belgium/ Luxembourg, Belize, Bermuda, Bhutan, Bolivia, Bosnia Herzegovina, Botswana, Brazil, British Virgin Islands, Brunei, Bulgaria, Cameroon, Canada, Cape Verde, Cayman Islands, Chad, Ethics 211-224. 50(3): Channel Islands, Chile, China, Colombia, Wei, S. (2000a) 'How taxing is corruption on international investors?' The Review of Economic and Statistics Congo, Cook Islands, Costa Rica, Croatia, Cuba, Cyprus, Czech Republic, Denmark, Dominica, Wei, S. (2000b) 'Local corruption and global capital flows', on Economic 303-354. Dominican Republic, Ecuador, Egypt, El Salvador, 2000(2): Brookings Papers Activity Wei, S. and Wu, Y. (2001) 'Negative alchemy? Corruption, Estonia, Faeroe Islands, Fiji, Finland, France, composition of capital flows, and currency crises', NBER French Polynesia, Gambia, Georgia, Germany, #8187, National Bureauof Economic Research, working paper Cambridge, MA. Gibraltar, Greece, Grenada, Guatemala, Wheeler, D. and Mody, A. (1992) 'International investment Guernsey, Guinea-Bissau, Guyana, Honduras, location decisions: the case of USfirms',Journal International of Economics Hong Kong, Hungary, Iceland, India, Indonesia, 33(1-2): 57-76. 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, of 38(2): 341-363. Academy Management Liberia, Libya, Liechtenstein, Lithuania, Macau, Journal Macedonia, Malawi, Malaysia, Mali, Malta, Marshall Islands, Mauritania, Mauritius, Mexico, Moldova, Morocco, Monaco, Mongolia, Netherlands, Nauru, Myanmar, Nepal, Appendix Netherlands Antilles, New Caledonia, New Zealand, Nicaragua, Nigeria, Niue, North Korea, Home and host countries Northern Marianas, Norway, Oman, Pakistan, Hostcountries Palau, Panama, Papua New Guinea, Paraguay, Armenia, Peru, Philippines, Poland, Portugal, Puerto Rico, Algeria, Angola, Anguilla, Argentina, 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 Central African Republic, Canada, Cape Verde, 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, Homecountries that do not appearin the list of host Morocco, Mozambique, Myanmar, Netherlands, countries Netherlands Antilles, New Zealand, Nicaragua, Afghanistan, Albania, Andorra, Antigua Barbuda, Norway, Panama, Paraguay, Peru, Poland, Saint Kitts Nevis, Saint Bahrain, Bangladesh, Barbados, Belarus, Bhutan, Portugal, Russia, Rwanda, Sierra Leone, Slovakia, Slovenia, Somalia, Bosnia Herzegovina, Botswana, British Virgin Lucia, Islands, Cayman Islands, Channel Islands, Spain, Suriname, Sweden, Switzerland, Tanzania, Trinidad Tobago, Tunisia, Turkey, Uganda, UK, China, Congo, Cook Islands, Croatia, Cyprus, Dominica, Egypt, Faeroe Islands, Fiji, French Uruguay, US, Uzbekistan, Venezuela, Zambia, Zimbabwe. Polynesia, Georgia, Gibraltar, Grenada, Guernsey,

dent variables', Econometrica 26(1): 24-36. UNCTAD (2005) 'World investment directory on-line. FDI country profiles', [www document] http://www.unctad. org/Templates/Page.asp?intltemlD=3198&lang=1 (accessed June 7, 2005). US Congress (1977) The Foreign CorruptPracticesAct of 1977, [www document] http://www.usdoj.gov/criminal/fraud/fcpa/ fcpastat.htm (accessed June 20, 2005). Voyer, P.A. and Beamish, P.W. (2004) 'The effect of corruption on japanese foreign direct investment', Journal of Business

journal of International Business Studies

Who cares about corruption? 822

Alvaro Cuervo-Cazurra

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.

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 develop 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. ProfessorCuervo-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.

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

of Business Studies Journal International