Corruption and FDI Inflows: Evidence from a Small Developing Economy

Abstract

This study proposes an analytical framework for examining factors affecting foreign direct investment (FDI) inflows into developing economies, taking Jordan as an example. It uses multivariate VAR analysis to address the relationships of FDI with institutional factors, economic factors, population and financial factors. It thus demonstrates the existence of a significant negative effect of corruption on FDI inflows. However, this effect is substantially alleviated by improving the quality of institutions and good governance in the country. Based on the analysis, the study proposes a number of policies that could assist in attracting FDI. Supportive policies that tend to limit corruption are more likely to enforce the rule of law and good governance, which can contribute positively to attracting FDI.