More than 40% of the world’s biggest recipients of greenfield foreign direct investment (FDI) score poorly in Transparency International’s latest corruption perception index (CPI), laying bare the complex relationship between a clean business environment and investment attraction.
Of the top 50 countries for foreign investment, based on fDi Markets data since 2003, 21 score in the lower half of the CPI risk spectrum including Brazil, Russia, India, China, South Africa, Mexico, Turkey and Vietnam.
According to Andreas Dressler, head of advisory firm FDI Center, local corruption is assessed when reviewing potential investment locations and companies highlight early on if they want to avoid countries where corruption is prevalent. But it is “not that high” of a priority, he said. “It’s typically a nice-to-have.”
While investors prefer transparent and open business environments where it is easier to assess profitability and opportunities, they still invest in countries that promise a level of return that mitigates the risk of corruption.
“Companies will factor it into their planning and put into place appropriate risk mitigation strategies to hopefully deal with that corruption if it arises,” said Mr Dressler. “First and foremost, companies want returns.” This is why big emerging markets with chequered track records on bribery and other types of corruption still lure significant FDI volumes.
Over the past decade, a growing number of countries have adopted, expanded and toughened penalties under laws that prohibit local companies from bribing foreign public officials. Mr Dressler said US firms are “very sensitive” to the Foreign corrupt Practices Act under which they can be fined up to $2m per violation. Penalties are even steeper under the UK’s Bribery Act, with companies facing unlimited fines and individuals up to 10 years in prison.
However, a 2020 assessment of 47 countries by Transparency International found that only four countries — the UK, US, Switzerland and Israel — actively enforce these laws. This is down from the seven countries identified in its assessment two years prior.
A nuanced relationship
The connection between FDI and local corruption has been studied extensively by economists over the past 20 years, but they have reached no conclusive link between the two. “The relationship between FDI and political determinants — in particular, corruption — is considered one of the most controversial areas of economic development,” said Eman Moustafa, senior economist at Egypt’s General Authority for Investment.
The dominant finding is that higher corruption hurts FDI by increasing the cost of doing business, distorting competition and incentivising the creation of more administrative procedures.
But several studies, including Ms Moustafa’s analysis of Egypt between 1970 and 2019, have found a positive correlation between corruption and FDI levels. This research, which predominantly focuses on emerging markets, supports the ‘helping hand’ or ‘greasing the wheel’ hypothesis that petty corruption can overcome bureaucratic obstacles to alleviate problems caused by inefficient public administration.
A handful of countries — including the US, Australia and New Zealand — have recognised the validity of this hypothesis by permitting facilitation payments under their foreign bribery laws. These are small amounts paid to foreign public officials to speed up routine government action.
Reflecting on her study, Ms Moustafa said there’s “no guarantee that low corruption leads to higher FDI” and that governments looking to attract investment are better off improving governance structures and laws rather than promoting their fight against corruption.
Of the world’s top 50 FDI recipients, Italy and South Korea have seen the biggest improvement in Transparency International’s CPI, which is based on experts’ perception of corruption in the public sector. Over the past five years, both countries have increased their score by nine points. The biggest declines have been in Canada, which has dropped eight points, followed by the US which has lost seven points.