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Corruption and FDI in natural resources: The role of economic downturn and crises

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  • Cruz, Manuel David
  • Jha, Chandan Kumar
  • Kırşanlı, Fatih
  • Sedai, Ashish Kumar

Abstract

This study adds to largely non-existent literature on corruption and foreign direct investment (FDI) in natural resources by examining the association between the two using a panel of 20 Latin American and Caribbean countries from 1995 to 2020. We find that higher levels of corruption are associated with lower levels of FDI in natural resources, supporting the “grabbing hand” or “sand-the-wheel” hypothesis. Further, we argue that during economic downturns and crises, corrupt agents are likely to use the prevalence of corruption to disregard laws to attract greater FDI in natural resources to compensate for the adversity brought about by hard times. Consistently, we find that while still detrimental to resource FDI, corruption's diminishing effects on resource FDI are much less pronounced during economic downturns and fiscal crises, with the latter measured by credit events leading to a reduction in the present value of the sovereign debt.

Suggested Citation

  • Cruz, Manuel David & Jha, Chandan Kumar & Kırşanlı, Fatih & Sedai, Ashish Kumar, 2023. "Corruption and FDI in natural resources: The role of economic downturn and crises," Economic Modelling, Elsevier, vol. 119(C).
    • Handle: RePEc:eee:ecmode:v:119:y:2023:i:c:s0264999322003595
    DOI: 10.1016/j.econmod.2022.106122
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    2. Priya, Pragati & Sharma, Chandan, 2023. "Reinforcing the effects of corruption and financial constraints on firm performance: Normal versus crisis period in developing economies," Economic Modelling, Elsevier, vol. 127(C).
    3. Hong, Ji Yeon & Yang, Wenhui, 2024. "How Natural Resources Affect Corruption in China," World Development, Elsevier, vol. 175(C).
    4. Li, Qiang & An, Lian & Zhang, Ren, 2023. "Corruption drives brain drain: Cross-country evidence from machine learning," Economic Modelling, Elsevier, vol. 126(C).
    5. Cooray, Arusha & Jha, Chandan Kumar & Sarangi, Sudipta, 2024. "Good governance in troubled times: What we know and what experts say," Economic Modelling, Elsevier, vol. 136(C).
    6. Chandan Kumar Jha & Fatih Kırşanlı, 2024. "Arab Spring, democratization of corruption, and income inequality," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 3678-3691, July.

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    More about this item

    Keywords

    Foreign direct investment; Corruption; Economic downturn; Sovereign debt; Fiscal crisis; Natural resources;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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