The corruption-foreign direct investment nexus in sub-Saharan Africa. Fresh evidence from a panel threshold regression approach
| Date | 07 July 2023 |
| Pages | 681-697 |
| DOI | https://doi.org/10.1108/JFC-05-2023-0119 |
| Published date | 07 July 2023 |
| Author | John Kwaku Amoh,Abdallah Abdul-Mumuni,Randolph Nsor-Ambala,Elvis Aaron Amenyitor |
The corruption-foreign direct
investment nexus in sub-Saharan
Africa. Fresh evidence from a panel
threshold regression approach
John Kwaku Amoh
Department of Accounting, University of Professional Studies, Accra, Ghana
Abdallah Abdul-Mumuni
Department of Banking and Finance, University of Professional Studies,
Accra, Ghana, and
Randolph Nsor-Ambala and Elvis Aaron Amenyitor
Department of Accounting and Finance,
Ghana Institute of Management and Public Administration, Accra, Ghana
Abstract
Purpose –Most emerging economies have made conscious efforts through policy initiatives to attract
foreign direct investment (FDI). However, a significant obstacle to FDI inflow has been the prevalence of
corruptionin the host country. This study, therefore, aims to examinewhether there is an optimum corruption
value thatresults in threshold effects of corruption on FDI.
Design/methodology/approach –To achieve this objective, this study used Hansen’s (1999) panel
threshold regression(PTR) model by using a panel data of 30 sub-SaharanAfrican (SSA) countries from 2000
to 2021.
Findings –This study finds that the nexus betweencorruption and FDI has a single threshold effect, with a
5.37% optimum corruption thresholdvalue. At this threshold value, corruption affects FDI negatively. Any
corruption valuethat is below the threshold value also elicits a negative corruption–FDIrelationship. Despite
having a negativerelationship when the corruption value is above the optimumcorruption threshold, it is not
statisticallysignificant.
Research limitations/implications –The implication of the results is that it is deleterious to use
corruptpractices to draw FDI to SSA nations.
Originality/value –To the best of the authors’knowledge, thisstudy is one of the first in the corruption–
FDI nexus literature to use Hansen’s PTR model to estimate an optimal corruption threshold. The authors
recommend that policymakers in the selected SSA countries reconsider the use of corruption to attract FDI
because thereis an optimal corruptionthreshold that could impact FDI in the host country.
Keywords Foreign, Investment, Corruption, Panel, Hansen, Threshold effect, Non-linear
Paper type Research paper
1. Introduction
Over the years, foreign direct investment (FDI) has remained the main external source of
financing for emerging economiesand has continued to play a significant role in the creation
of global wealth (United Nations Conference on Trade and Development, UNCTAD, 2018;
Zangina et al., 2020). Theseemerging economies have been forced to explore FDI as a viable
method of enhancing domestic capital to boost productive resources and support their
Foreign direct
investment
681
Journalof Financial Crime
Vol.31 No. 3, 2024
pp. 681-697
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-05-2023-0119
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
developmental programmesdue to their low level of savings capacity, capital deficiency and
declining domestic revenues.Again, Zangina et al. (2020) assert that FDI inflows contribute
significantly to the host country’s growth process through the transfer of managerial and
technological skills, as well as by promoting domestic competition, creating jobs and
facilitating access to the global market. FDIinflows also contribute to the generation of tax
revenue in addition to closing the savings–investment gap (Quazi et al.,2014). The World
Bank (2018) defines FDI as a cross-country investment that involves the exerciseof control
or significant influence by a resident of a country over an enterprise located in another
economy.
Consequently, according to Zangina et al. (2020), the desire to realise the actual and
potential benefits of FDI has driven most emergingeconomies to make deliberate efforts to
entice FDI through policy initiatives around their macroeconomic environments. However,
the prevalence of corruption in the host nation, along with other institutional and
macroeconomic factors, has been noted as a major barrier to FDI inflow (Gossel, 2018;
Zangina et al., 2020). As a result, corruption has spread throughout most nations in the
world (Heo et al.,2021). Thus, corruption is increasingly becoming a cancer in the political
world.
Although with contrasting views, this increased concern about corruption in the public
policy sphere is also evident in academia. According to some researchers, corruption
significantly reduces investment and growth,supporting the “sand the wheels”hypothesis.
According to some studies (M
eon and Sekkat, 2005;Nguyen et al.,2017), a number of
channels of corruption have been identified, including those that lower investment rates,
increase uncertainty, createadditional financial burdens for businesses that have an impact
on their profits and delay the commencement of business operations. Because corruption is
costly and raises a company’s costs,the field of international business assumes that it is bad
for FDI and “sands the wheels”of commerce (Canare, 2017;Kennedy, 2018;Karim et al.,
2018;Cruz et al.,2023).
In contrast, another body of research supports the “grease the wheels”hypothesis and
believes that corruption is advantageous in environments withweak institutions (including
legal systems) and onerous regulatory requirements. For instance, bribery can be used to
bypass red tape and getaround bureaucratic obstacles (Leff, 1964;Huntington,1968;Gossel,
2018;Omodero, 2019).According to Martins et al. (2020) and Marakbi et al. (2021), corruption
in this case “greases the wheels”of the economy and can stimulate the growth and
investment engines(Bardhan, 1997;Belloumi and Alshehry, 2021).
However, there is stilldisagreement over whether corruption acts as sand or greasein the
wheels of FDI, despite thefact that there have been many empirical studies on the subject in
recent years (Gossel, 2018;Wanget al., 2020;Heo et al.,2021). This paper aims to fill this gap
in the literature by examining the point at whichcorruption “sands”or “greases”the wheels
of FDI activities in sub-Saharan African (SSA) countries, drawing on the aforementioned
academic debate. Because the “sand the wheels”hypothesis is widely supported in the
literature, we look into the level at which corruption shifts from helping to hurting FDI and
vice versa. The paper also investigateswhether there is an optimal level of corruption below
or beyond which it is harmfulor beneficial to FDI.
The following contributions are made by this paper: Firstly, by using Hansen’s (1999)
panel threshold regression (PTR) model, the study investigates the optimum rate at which
corruption becomes advantageousor deleterious to FDI in SSA countries. This paper is one
of the premier attempts to use the Hansen’s(1999)method to examine the relationship
between corruption and FDI. This panel non-linear threshold model, as opposed to the
conventional panel linear model, can determine the rate at which corruption becomes
JFC
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