Abstract

Corruption, defined as the misuse of public power for private gains, is a problem for many emerging and developing countries. Corruption increases the poverty and reduces growth and investment. This paper aims to analyze the relationship between corruption in the host country and the US foreign direct investment towards that country. I use two measures for corruption: The Corruption Perceptions Index and the corruption distance, which is the absolute difference of the corruption in the host and the US. Using a sample of 47 countries that receive the US foreign direct investment, I find that corruption is a strong determinant of US FDI outflows and the US investors are reluctant to invest in corrupt countries. Moreover, corruption distance has a negative effect on US FDI since as the distance in corruption increases, we observe less US FDI towards the host country.

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