Impact of Corruption on Foreign Direct Investment in Africa

Rahim Quazi, Vijay Vemuri, Mostafa Soliman


(FDI) in developing countries. The FDI literature comprises two opposing views of corruption—the grabbing
hand hypothesis holds that corruption impedes FDI by raising uncertainty and transaction costs and the helping
hand hypothesis holds that corruption facilitates FDI by greasing the wheels of commerce in the presence of
weak regulatory frameworks. This study analyzes the impact of corruption on FDI inflows in 53 countries in
Africa over the 1995–2012 period. Using the dynamic System Generalized Method of Moments modeling
framework (Arellano-Bover/Blundell-Bond linear dynamic panel), this study finds support for the helping hand
hypothesis, i.e., corruption facilitates FDI inflows in Africa. It is likely that the overall regulatory environment in
Africa is weak, which helps explain the context in which the helping hand hypothesis can be validated. In
addition, this study finds that past levels of FDI, market size, government effectiveness, infrastructure, and
economic freedom also affect FDI significantly. These results further our knowledge of the FDI dynamics in
Africa, which policymakers should find helpful in devising pro-FDI strategies

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International Business Research  ISSN 1913-9004 (Print), ISSN 1913-9012 (Online)

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