Corruption and foreign bank entry denials: A cross‐country panel analysis

The existing literature largely reports a negative effect of corruption on foreign direct investment (FDI) and explains it by the unwillingness of foreign investors to invest due to the high post‐entry costs and risks of corruption. However, in addition to affecting foreign investors' willingness to invest, corruption can also affect their ability to invest. This latter channel is less explored. To fill this gap, we use cross‐country panel data to analyse the relationship between corruption and foreign bank entry denials. Our fixed‐effects estimation results, as well as the following sensitivity checks show that corruption can also be an entry‐point deterrent: corrupt host countries are more likely to deny entry to foreign banks. This finding suggests that at least some foreign investors are forced rather than choose to stay out of corrupt countries. A policy implication could be that reducing the entry‐point corruption can increase foreign investment even if the post‐entry costs and risks of corruption remain unchanged.