The effect of corruption on foreign direct investment in West African Sub-Region

Emediegwu, Lotanna ORCID: https://orcid.org/0000-0001-7844-0397 and Edo, Samson (2017) The effect of corruption on foreign direct investment in West African Sub-Region. West African Financial and Economic Review, 17 (2). pp. 119-140. ISSN 0263-0699

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Abstract

The debate bothering on impact of corruption on foreign direct investment (FDI) inflows has been on the rise since the past century. Is corruption a hurting hand – raising uncertainty and transaction costs for foreign investors – or a helping hand – lubricating the wheels of commerce in the presence of pre-existing government or bureaucratic failures, which would attract FDI? As theoretical thoughts and empirical evidence show that the nexus between corruption and FDI is unsettled, this paper tries to take another step. It examines the link between corruption and FDI flows to the West African subregion. Using several econometric models on a strongly balanced panel of 16 West African countries spanning from 2003 to 2014, we find evidence that corruption is an insignificant determinant of FDI. Furthermore, we found that FDI in West Africa responds positively to both civil liberties and level of democracy. Corruption in West Africa does not necessarily hinder foreign investments. Hence, corruption should be handled based on logical legal proceedings that neither threaten the security of international investors nor encroach on their freedom and rights which are the real stimulants of FDI in West Africa rather than low corruption.