A generalized empirical model of corruption, foreign direct investment, and growth

Who really wins from foreign direct investment (FDI) and by how much? Should winners care about corruption? Building on evidence of heterogeneity in the FDI-growth relationship, we propose a semiparametric model that allows corruption to influence the relationship between the conditioning variables and GDP growth, parameter heterogeneity of unknown form, and the use of instrumental variables. We find evidence that corruption has a sizeable nonlinear role in the FDI-growth relation, weakening the effectiveness of FDI at improving growth rates in many developing countries. Developing countries with insignificant or low returns to FDI may benefit substantially from reducing corruption.