The Relationship between Perceived Corruption and FDI : A Longitudinal Study in the Context of Egypt

This paper investigates the dynamic relationship between perceived corruption and foreign direct investment (FDI) in Egypt during the period 1970–2019. Using a novel back-casting methodology, it extrapolates perceived corruption time series between 1970 and 1980. The results of the Johansen cointegration technique and the multivariate vector error correction model show a positive relationship between perceived corruption and FDI, supporting the “greasing the wheels” effect of corruption. This positive association can be explained by several factors, such as the cross-interdependence of rent-generating assets with perceived corruption and FDI, and the use of FDI data based on the balance of payments that has growing financial-flows and phantom-FDI components. The findings of this paper have important policy implications. Improving the fundamental governance structure in Egypt should be accompanied by a comprehensive investment facilitation strategy to compensate for the removal of “grease” from the “wheels”