As was touched upon in chapter two, section 2.3, it is very possible that corruption is affected by contextual factors, such as all the factors that comprise the investment climate. Huntington and Leff (1968; 1964) stated that in lieu of non-existing or inefficient formal institutions,
29 corruption could increase investment based on the potential benefits it can provide. I therefore create hypotheses with two institutions, or collection of institutions, namely governmental/state institutions, and the judicial institution.
3.3.1. Corruption and governmental/state institutions
One of the arguments made in this thesis is that the conceptualization of corruption is lacking and flawed in the literature. Some view corruption as flaws in governmental and state institutions (Goswami and Haider 2014; Shapiro and Globerman 2002), and therefore not a true phenomenon in its own right.20 Others view corruption as a phenomenon of its own, separate from any particular institution, such as the bureaucracy, justice system, public services, and so on.21 In addition, Tina Søreide argues in her new book on corruption and the justice system that corruption is something that can take place in countries with solid institutions, referring to the French Elf case (Søreide 2016). I adhere to this understanding as well. It is perfectly possible to have good institutions, be they of democracy, bureaucracy or juridical. For yet another example, Italy is acknowledged as a highly developed, democratic and institutionalized country. It is also infamous for relatively high levels of corruption (“Transparency International” 2016).
As discussed, I argue that the negative effects of corruption in terms of affecting foreign investors, is the relative degree of risk involved, and the relative degree of uncertainty it can create around the investment relative to the potential benefits. Now, clearly there are benefits as well, as described in chapter two. If governmental and state institutions such as the bureaucracy, public services, and the civil servants are of high quality in terms of competences, efficiency and capacity, several of the advantages that comes with corruption would be less needed (the function as an informal market, increasing speed and efficiency, making up for lacking incentives in bureaucracy). As such, the amount of risk and uncertainty relative to the potential benefits would change, possibly making corruption mainly a cost in a cost – benefit analysis taken in the decision making process of the multinational corporation, framed by the OLI-paradigm. I therefore propose the following hypothesis
20 Whether by explicit explanation, such as “levels of corruption as a proxy for the quality of x institution” or by not explaining it, adding it into a government or institutions aggregated variable.
21 Note that even in the cases where corruption is seen as a phenomenon in its own right, high levels of corruption is often associated with poor quality of different institutions.
30 H4: In countries that have high quality governmental and state institutions, corruption decreases the inflow of foreign direct investment.
3.3.2. Corruption and the judiciary.
The juridical institution, or rule of law as some refer to, has from both the FDI literature and the political risk literature, received special attention. It is by many viewed as a key institution for both business and the quality of governance in terms of providing secure property rights and protecting the individual from the state and others (Herzfeld and Weiss 2003, 621; Jakobsen 2012, 96–97). If corruption negatively affects FDI inflows by increasing risks and uncertainty around the investment concerning whether or not people will hold up their end of the deal, by doing unfair renegotiations, creating problems, or even outright expropriate the investment, a solid and institutionalized judiciary and rule of law would be a great security net. If the courts are independent of the state and government, not arbitrary and unfair (prioritizing country interests over the law), issues can be subjected to fair arbitration. For example, if a key bureaucrat or politician suddenly reneges on a contract, or subjects the investment to increased costs or even tries to expropriate it, it will not necessarily be of any real consequence if the courts could reverse it and impose sanctions. In addition, a strong rule of law and judiciary would work as a check on leaders and decision-makers, reducing uncertainty around them holding their end of the deal (Jakobsen 2012, 96).
On the other hand, if the courts and rule of law are highly institutionalized, it might actually reinforce the risks and uncertainty corruption creates,22 because you would have no control or influence over what the judiciary would or could do. If a deal is made through corrupt processes, the judiciary might find the company equally responsible, finding the deal null and void, and imposing fines on the company. In addition, the risk of someone leaking the information to the judicial authorities are larger, and the certainty of sanctions are larger (you would be less able to bribe your way out). The degree to which one can trust the individuals one engages with in corruption would also be lower, because they would have a viable option of reporting this to the judicial authorities. Therefore, I present the following hypothesis:
H5: In countries that have high quality juridical institutions, corruption will decrease the inflow of foreign direct investment.
22 To be perfectly clear, I am not arguing here that a strong judiciary and rule of law would deter FDI inflow in and of its own (it would probably increase it), but that the effect of corruption would be different in this setting.
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