Dynamic Effects of Corruption on Offshoring

Abstract: For international outsourcing to occur, agents from different jurisdictions must agree on a contract. Using Swedish firm-level data, we analyze offshoring and how a firm’s choice of target country and the dynamics of offshored volumes are affected by corruption. The results suggest that corruption is a deterrent to offshoring and that internationalized firms trading with many countries use their flexibility to avoid corrupt countries. Furthermore, firms that are able to establish long-term contracts do so by starting small and successively deepening their engagements.