Abstract

This research paper investigates the effect of corruption on foreign direct investment (FDI) and compares the average corruption of Pakistan with 36 sampled countries on the basis of average corruption perception index (CPI) scores. There are two contemporary theories on the relationship of corruption and FDI, as according to ‘grabbing hand’ raising the cost of transactions and uncertainty which should deter inflow of FDI and in contrast ‘helping hand’ lubrication or greasing the wheels of business against the rigid and strict economic regulations by facilitating transaction and investment which should foster FDI. The sample consists of 37 Asian countries including Pakistan over the time span of 1995 to 2014 and using random effects (GLS) regression to analyse the data. In first part of study, the empirical results indicate that corruption has negative and significant effect on FDI which tends to discourage the inflow FDI in Asia and validates the grabbing hand theory of corruption. In addition the other variables GDP growth, openness, infrastructure and education are tested and find positive and significant relationships with FDI. On the basis of present study findings it is suggested that FDI can be attracted by eliminating level of corruption in Asian economies. The second part of the study is based on comparison, for which ANOVA analysis and Least Significant Difference (LSD) technique are conducted. The findings of the ANOVA analysis reveal that Pakistan with low average CPI score is ranked at 30th position in sample of 37 countries. Moreover, the results show that 29 countries are less corrupt and only 7 countries are more corrupt than Pakistan.

Key words: Corruption, Foreign Direct Investment and Asian Economies