A potential negative externality of foreign financial flows is on the local host political economy. Combining geo-referenced, foreign direct investment (FDI) data and household level surveys, this paper uses spatial-temporal techniques to assess if local FDI contributes to or mitigates corruption and if this relationship is conditional on engagement with the OECD’s anti-bribery convention. We find broad evidence that FDI flows reduce some types of local corruption, but only when existing levels of corruption are high. Membership and enforcement of the OECD anti-bribery convention generally does not improve this performance but may influence FDI from these states locating to less corrupt locations. These results are robust to a number of alternative specification and estimation choices. Collectively, these results suggest that the “sunshine” effects of the professionalization and wealth mechanisms of FDI may reduce corruption, but regulatory pressure pathways do not.
Funding: The authors thank the University College Dublin College of Social Sciences and Law and the European Union’s Horizon 2020 research and innovation programme under grant agreement number 693609 (GLOBUS) for generous funding support for this project.