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Better the devil you don't know: Types of corruption and FDI in transition economies

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  • Cuervo-Cazurra, Alvaro

Abstract

Corruption has a negative impact on foreign direct investment (FDI). However, transition economies show high levels of corruption and also high levels of FDI. I argue that it is not the level but rather the type of corruption that affects FDI in transition economies. Pervasive corruption, or corruption that is widely present, acts as a deterrent to FDI because it increases the known costs of investing, while arbitrary corruption, or corruption that is uncertain, does not have such a deterring influence because it becomes part of the uncertainty of operating in transition economies. In transition economies, investors prefer to deal with an unknown evil - arbitrary corruption - rather than a known one - pervasive corruption.

Suggested Citation

  • Cuervo-Cazurra, Alvaro, 2008. "Better the devil you don't know: Types of corruption and FDI in transition economies," Journal of International Management, Elsevier, vol. 14(1), pages 12-27, March.
    • Handle: RePEc:eee:intman:v:14:y:2008:i:1:p:12-27
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    More about this item

    Keywords

    F21 F23 D73 K42 P37 Corruption Foreign direct investment Institutions Transition economies;

    JEL classification:

    • 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
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • P37 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Legal

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