Oil, Foreign Direct Investment, and Corruption

This paper examines the complex relationship between oil, corruption and foreign direct investment (FDI). There has been a debate in the literature about how corruption impacts FDI, with conflicting empirical results. In this paper, we examine whether oil production can help to explain these mixed results. Specifically, we find that the negative impact of corruption on FDI inflows is partially mitigated by countries’ oil production. FDI is also less sensitive to traditional variables such as GDP in oil producing countries. This paper also analyzes causality in the other direction and finds that FDI inflows may help to reduce corruption in countries, including in oil producers. This suggests a potential for a “virtuous cycle” where less corrupt governments attract more FDI which, in turn, helps to keep corruption low. With the advantage of our panel data set we are able to account for issues of endogeneity in the causality between FDI and corruption. These results suggest that the motivation behind FDI is important in determining its relationship with corruption and natural resources may be a significant component in this relationship.