Does anti-bribery enforcement deter foreign investment?

Abstract

This article presents the first empirical evidence that bilateral fixed capital flows fall in response to anti-bribery enforcement actions. We hand-collect data on individual enforcement actions initiated by the US Department of Justice (DOJ) and show that anti-bribery enforcement in a country is followed by a 40% reduction in foreign fixed capital investments made by US companies in that country.

Keywords:

• Foreign Corrupt Practices Act
• multinational firms
• cross-border mergers
• foreign direct investment
• anti-bribery legislation

JEL Classification:

• F21
• K22
• G38

Notes

¹ 15 U.S.C. 78dd-1, et seq.

² Cheung, Rau and Stouraitis (2012) estimate that $1 in bribes generates $11 of firm value, and Zeume (2014) shows that bribery is an important input into the production function for the foreign operations of multinational companies that operate in highly corrupt countries.

³ See FCPA Release 2003-01, http://www.justice.gov/criminal/fraud/fcpa/opinion/2003/0301.pdf.

⁴ Mearle (2004).

⁵ Because our goal is to explain the impact of enforcement activity rather than to forecast cross-border acquisition behavior, we estimate the difference-and-difference specification Equation 1 with heteroscedasticity and autocorrelation-robust SEs rather than by forecasting with vector autoregressions. This approach focuses attention on the impact of prior FCPA enforcement actions while producing estimates robust to arbitrary forms of serial correlation (Wooldridge 2002).

⁶ We check for the possibility of a unit root by estimating panel-data analogues of the familiar Dickey–Fuller and Phillips–Perron tests (Choi 2001). These tests reject the null of a unit root at the 1% level, indicating that Equation 1 is appropriately estimated in levels on our data set.

⁷ We also estimated a linear model via OLS with serial correlation and heteroscedasticity-robust SEs and with country-specific fixed effects (results not reported). The estimate of the effect of FCPA enforcement on future cross-border mergers was negative and both statistically and economically significant.

Additional information

Funding

The authors thank the Grinnell College Committee for the Support of Faculty Scholarship for financial support for this project.