Asymmetric influence of corruption distance on FDI

Published date02 July 2018
Date02 July 2018
Pages845-858
DOIhttps://doi.org/10.1108/JFC-09-2017-0078
AuthorBirgit Burböck,Anita Macek,Edith Podhovnik,Christian Zirgoi
Subject MatterAccounting & Finance,Financial risk/company failure,Financial crime
Asymmetric inuence of
corruption distance on FDI
Birgit Burböck,Anita Macek,Edith Podhovnik and Christian Zirgoi
FH Joanneum, Graz, Austria
Abstract
Purpose The purpose of this paper is to measure the inuence of corruption distance (CD) on foreign
direct investment (FDI) with the characteristicsof the value function from the Prospect Theory (PT) such as
loss aversionand diminishing sensitivity.
Design/methodology/approach Data are derived from Transparency International and the
Organisation for Economic Co-operation and Development (OECD) and tested on the countries China, Germany,
Italy, Japan, Korea, Russia, Spain and the UK and are analysed with a natural log (LN) regression model.
Findings The ndings indicatea negative asymmetric relationship for China, Germany, Korea,Spain and
Russia. This means that negative performance on CD will not have greater impact on FDI outows than
positive performance on CD in the same country. Loss aversion, as well as diminishing sensitivity, as
suggestedby the PT, cannot be supported with the empiricalresults.
Originality/value Its originality lies in contributingand extending knowledge on CD on FDI in several
ways. First, it analyses the dataof emerging and industrialized countries, namely, Russia,China, Germany,
Italy, Japan, Korea, Spain and the UK. Second, a potential asymmetric impact is explained by the
characteristicsof the hypothetical value function of the PT. Third, it seeks empiricalevidence by applying an
econometricmodel developed to analyse the variables CD and FDI.
Keywords Foreign direct investment, Prospect theory, Corruption distance
Paper type Research paper
1. Introduction
Whenever rms want to expand into international markets, foreigndirect investment (FDI)
is one possible option to enter the markets (Harrison, 2003). FDI encourages the transfer of
technology and know-how by creating direct, stable long lasting links between countries
(OECD, 2014). FDI might be important especially for emerging markets. FDI can provide
additional nancial resources (Wong and Adams, 2002), and, compared to domestic
investment, FDI can make a relatively high contribution to economic growth (Borenzstein
et al., 1998). FDI can help to boost productivity and growth through the transfer of
intangible assets, such as knowledge,technology, skills and management know-how (Wong
and Adams 2002). Alam and Ali Shah (2013) argued that market size, labour costs and the
quality of infrastructureare the most important factors attracting foreign investment.
From a theoretical viewpoint, the costsof corruption can be regarded as additional costs
of doing business or sometimes calledadditional tax on prots. In other words, corruption
may decrease a companys expected protability of an investment project in a country.
Therefore, rms investingabroad will incorporate the level of corruption of the host country
© Birgit Burböck, Anita Macek, Edith Podhovnik, Christian Zirgoi. Publishedby Emerald Publishing
Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone
may reproduce, distribute, translate and create derivative works of this article (for both commercial and
non-commercial purposes), subject to full attribution to the original publication and authors. The full
terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode
Corruption
distance
845
Journalof Financial Crime
Vol.25 No. 3, 2018
pp. 845-858
EmeraldPublishing Limited
1359-0790
DOI 10.1108/JFC-09-2017-0078
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm

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