The Impact of Corruption on Foreign Direct Investment (FDI) in Post-Conflict Countries: A Panel Causality Test

Abstract

This paper provides an additional examination on the relationship between corruption and FDI. It focuses on the impact of corruption on FDI inflows in Post-Conflict Countries (PCC) namely Algeria, Congo DR, Iraq, Kenya, Peru, Sierra Leone, South Africa, and Sudan over the period from 1984-2013. The paper applies Dynamic Ordinary Least Squares (DOLS) method in order to test for the long-run effect of corruption on inward FDI in PCC utilising E-Views 9 as a statistical package. The results show that corruption impacts negatively upon inward FDI in PCC in the long-run, and the 1 unit increase in corruption decreases inward FDI by -1.34 unit. The paper further suggests that PCC should pay more attention for institutional reform in its general notion, and for corruption in particular, given that more corrupt institutions in PCC may exacerbate their own difficulties in providing a friendly-business environment and eventually hinder their efforts in attracting FDI. As policy implications, the paper suggests that PCC should rely on both their own capabilities as well as specialized international institutions in order to achieve a better institutional reform, and learn the best international practices in fighting corruption.

Key words: Corruption, FDI, Post-Conflict Countries, Panel Causality Test.