GROUP ASSIGNMENT COVER SHEET STUDENT DETAILS Student name Lê Trần Công Thành Student ID number 31211024248 Student name Nghiêm Xuân Bảo Student ID number 31211024578 Student name Bùi Nguyễn Khánh Hà S.
GROUP ASSIGNMENT COVER SHEET STUDENT DETAILS Student name: Student name: Student name: Student name: Student name: Lê Trần Công Thành Nghiêm Xuân Bảo Bùi Nguyễn Khánh Hà Đặng Hoài Thanh Trúc Lê Thị Xuân Quỳnh Student ID number: Student ID number: Student ID number: Student ID number: Student ID number: 31211024248 31211024578 31211023060 31211023652 31211023788 UNIT AND TUTORIAL DETAILS Unit Unit name: Applied Econometrics number: Tutorial/Lecture Class day and : Dr Le Anh Tuan time: Lecturer or Tutor name: Ms Le Thi Ngoc Mai AE_S1(2022_2023)DH47IS B-8 ASSIGNMENT DETAILS Title: Final Report Length: Due date: Date submitted: DECLARATION I hold a copy of this assignment if the original is lost or damaged I hereby certify that no part of this assignment or product has been copied from any other student’s work or from any other source except where due acknowledgement is made in the assignment I hereby certify that no part of this assignment or product has been submitted by me in another (previous or current) assessment, except where appropriately referenced, and with prior permission from the Lecturer / Tutor / Unit Coordinator for this unit No part of the assignment/product has been written/ produced for me by any other person except where collaboration has been authorised by the Lecturer / Tutor /Unit Coordinator concerned I am aware that this work may be reproduced and submitted to plagiarism detection software programs for the purpose of detecting possible plagiarism (which may retain a copy on its database for future plagiarism checking) Student’s signature: Lê Trần Công Thành Student’s signature: Nghiêm Xuân Bảo Student’s signature: Bùi Nguyễn Khánh Hà Student’s signature: Đặng Hoài Thanh Trúc Student’s signature: Lê Thị Xuân Quỳnh The relationship between Perceived Corruption and FDI in the G20 countries in the period of 2012-2021 Note: An examiner or lecturer / tutor has the right to not mark this assignment if the above declaration has not been signed THE RELATIONSHIP BETWEEN PERCEIVED CORRUPTION AND FDI IN THE G20 COUNTRIES IN THE PERIOD OF 2012-2021 2 The relationship between Perceived Corruption and FDI in the G20 countries in the period of 2012-2021 ABSTRACT This paper examines the impacts of perceived corruption on FDI in various countries over the 2012-2021 period This study also discusses whether trade openness affects such relationships By using multiple regression analysis with the data of 200 observations, including countries in the G20, we found that corruption has a negative relationship with foreign direct investment Our empirical results also reveal that there is significant evidence to conclude the impact of trade openness on the differences of these relationships KEYWORDS: corruption, FDI, trade openness, G20 3 The relationship between Perceived Corruption and FDI in the G20 countries in the period of 2012-2021 Table of Contents Introduction a Overview of the problem A thriving field of investigation on the FDI and Corruption’s connection has emerged over the past three decades as a result of a rising FDI sector and novel FDI recruiting techniques in countries all over the world From $58 billion in 1982 to $1540 billion in 2019, FDI inflows rose FDI outflows totaled $1314 billion and $27 billion, respectively (Luu et al, 2019) This study will offer data and bits of evidence to back up the claim that FDI contributes to corruption worldwide, particularly in developing nations b Research Gap Even though the connection between corruption and FDI has been well investigated, the literature is still not clear Globally, research on the connection between FDI, corruption, and company success has a long history and has generated contentious discussion (Krifa et al, 2022) While some research indicated that corruption discourages FDI, others came to the opposite conclusion.Therefore, FDI may be and usually is a key driver of economic growth and job creation for many local and national businesses Moreover, corruption's concealment and illegality cause major market distortions and uncertainty in the corporate world c Research Question Despite the fact that there are several theoretical and empirical research on FDI, unexpectedly, their sample sizes only contain businesses in developed nations, which continues to spark numerous public discussions in other areas (Chang et al, 2011) Additionally, relatively little study has been done to determine how inward FDI affects businesses in the countries that receive such direct investments (Gracia et al, 2013) The relationship between FDI and company performance was specifically examined in the enlarged EU and was thought to have favorable direct benefits but restricted size (Bruno 4 The relationship between Perceived Corruption and FDI in the G20 countries in the period of 2012-2021 et al., 2014) It is crucial for managers and policymakers to comprehend FDI's influence, particularly on productivity, as it is not only seen as an engine for economic growth but also forces businesses to fight for customers We thus aim to investigate the unique impact of FDI influx on corruption globally as the primary view of this study d Motivation By investigating whether and how inbound FDI and the prevention of corruption impact the performance of nations throughout the world, this study hopes to partially settle the argument We investigate the effects of FDI inflow and the degree of corruption control on a firm's ROA and sales growth rate using data from the World Bank for the years 2012 to 2021 Additionally, compared to earlier times, our civilization is richer now The economic freedom system has ensured universal affluence (Lemicux et al, 2018) Because of this, we also ask if FDI and corruption have distinct consequences in other nations and continents, especially in more diverse and developed countries like G20 For all of the reasons that have been listed above, this assignment examines the relationship between FDI and Perceived Corruption to answer the question: Is the impact of corruption on FDI significant? e Contributions of the proposal The study adds to the body of knowledge The effects of inward foreign investment and the rate of corruption control are novel additions to the body of knowledge and the field of business development, respectively First, we provide international evidence about the influence of FDI and the control of corruption on G20 performance specifically The fact that we divide and examine the various impact levels of FDI and corruption control among nations with high and poor economic freedom is specifically another significant discovery Finally, by offering insightful information on FDI and corruption and generating a fresh perspective on their relationship, this article may be utilized as a reference for individuals who are interested in learning more about the pertinent subjects f Summary hypothesis In our research, we have found two hypotheses First, in particular for the top percentile of FDI stock distributions, the effect of corruption on FDI may not be 5 The relationship between Perceived Corruption and FDI in the G20 countries in the period of 2012-2021 detrimental However, if a country is selected as the host country, a higher level of corruption would not deter FDI, according to the parametric analysis, which demonstrates that higher levels of corruption would deter FDI otherwise (Barassi and Zhou, 2012) And with all the studies before, we suppose that low corruption levels positively influence foreign direct investment Second, we continue to investigate the connection between corruption and openness Trade openness, which is influenced by import, export intensity, and tariff barriers, has a negative impact on corruption (Larran & Tavares, 2000) Regardless of the choice of a functional form, the corruption index, and the inclusion of additional pertinent factors, both the quality (the extent of trading partners' corruption) and the level of openness (total trade estimated by imports and exports) have significantly constrained corruption (Gokcekus & Knörich, 2006) By that means, we came up with the hypothesis of the negative impact of corruption on FDI is weaker in countries with high openness g Summary Empirical Result This study reviewed the situation of corruption in G20 countries, over a period of years, from 2012 to 2021, and the effect of it on those countries’ FDI The empirical results of our investigation bring out the conclusion that corruption goes the opposite way with foreign direct investment, and the coefficients are statistically significant in almost all cases And also, the effect of perceived corruption on FDI is less pronounced for countries with high levels of trade openness We have found that there are implications for these results With the perceived corruption in G20 countries, these governments should not only focus on controlling corruption, but also have to improve on other variables By that means, they can enlighten the relationship between FDI and corruption in G20 countries The results of this study are shown below The literature review is evaluated in Section and our hypotheses are developed Section provides details on the information and methodology Section presents empirical findings Section presents our conclusion Literature review and hypothesis development a 6 Overview of the problems and prior studies The relationship between Perceived Corruption and FDI in the G20 countries in the period of 2012-2021 When someone or a group of people in a position of authority engages in corruption, they are engaging in a type of dishonesty or an offence with the intent to enrich themselves or their organisation by abusing their position of authority Additionally, we might describe "corruption" as dishonest or unlawful behaviour, particularly by influential persons (such as government officials or police officers) Bribery, influence peddling, and embezzlement are just a few of the various behaviours that corruption may encompass It may also involve actions that are lawful in many nations Over the past three decades, a growing area of study on the connection between corruption and FDI has evolved as a result of an expanding FDI industry and cutting-edge FDI recruiting strategies in nations all over the world More specifically, several prior studies and theories have been developed to explain the relationship between these two elements For instance, one of the factors influencing the location of FDI has recently been added: the level of corruption in the host country According to Mudambi, Navarra & Delios (2013), the literature holds that corruption is a factor that determines FDI on its own (Habib & Zurawicki, 2002; Voyer & Beamish, 2004), whereas, actually, the cost of government regulation affects both FDI and corruption (Rose-Ackermam, 1999; Shleifer & Vishny, 1999) This article examines the connection between corruption and FDI flows to the Middle East and North Africa in order to determine whether corruption is more significant than other FDI factors, in addition to another journal's attempt to take another step because the data on the causal relationship between corruption and FDI remained ambiguous (Helmy, 2013) b Theories to support the research question Using parametric and non-parametric techniques, a European journal on political economy found that corruption generally has a very negative impact on the likelihood of FDI Additionally, they show that the impact of corruption on the stock of FDI is not consistent After accounting for other pertinent factors including MNEs' site preferences, market size, and factor costs between 1996 and 2003, the impact of corruption on FDI may not be negative, particularly for the top percentile of FDI stock distributions Meanwhile, the parametric analysis shows that a higher degree of corruption would discourage FDI, but that if a nation is chosen as the host country, a higher level of corruption would not discourage FDI (Barassi and Zhou, 2012) Another article researching evidence on corruption as an incentive for foreign direct investment implies that perceived corruption may, over time, account for up to 40% of the observed global FDI increase in the nations in their dataset FDI from nations with a reputation for 7 The relationship between Perceived Corruption and FDI in the G20 countries in the period of 2012-2021 corruption or weak institutions is becoming more significant These investments are frequently made in nations with similar levels of corruption Both the amount of corruption in the host country and the disparity between home and host country corruption have a negative impact on FDI (Brada, Drabek, Mendez & Perez, 2019) In addition, according to Tosun and İYIDOĞAN (2014), it is discovered that corruption has negative long- and short-term effects on foreign direct investment in Turkey, proving the absence of "helping hand" corruption there Long-term FDI growth also coincides with rising income Contradictory to predictions, it has been found that a rise in political risk has a short-term positive impact on FDI inflows The empirical findings show that corruption is a deteriorating factor that seriously restricts FDI inflows When the two main FDI components - greenfield investment and cross-border M&As - are independently evaluated, this outcome appears to be in contradiction In particular, corruption continuously deters cross-border mergers and acquisitions over time, while it seems to have a beneficial impact on greenfield investments (Luu, Nguyen, Ho and Nam, 2018) When the GDP per capita is removed from the regression, the amount of corruption in the host nation has a negative impact on FDI inflows Nevertheless, the findings indicate that, in promoting FDI inflows into the country, the GDP per capita as a proxy for market size and the nation's quality of institutions are more significant than the amount of corruption (Epaphra & Massawe, 2017) Because it interferes with investment operations and inflows of foreign direct investment, corruption poses a significant barrier to economic progress in MENA nations To stop the corruption epidemic in this situation, governments must put into place strong anti-corruption measures (Hakimi & Hamdi, 2017) c Empirical papers to support these theories The relationship between corruption and the inflow of foreign direct investment (FDI) is the focus of this essay The researchers discovered that a lot of earlier publications on the subject had concentrated on the adverse/beneficial consequences of corruption on FDI influx after reviewing the prior literature By raising the amount of transaction costs and uncertainty, corruption may have a detrimental effect on FDI These elements are anticipated to hinder FDI By "greasing" the wheels of commerce, corruption may also have a favourable effect on FDI That is, corruption might encourage investment by serving as "grease money," allowing investors to get through red tape and speed up decision-making Here, the term "money" refers to bribes This theory holds true when there is a lack of adequate regulatory oversight, and corruption 8 The relationship between Perceived Corruption and FDI in the G20 countries in the period of 2012-2021 may positively affect FDI For instance, Quazi (2014) examined 1995–2011 panel data and discovered that corruption had a robustly negative influence on FDI have looked into Over the years 1998 to 2008, the effect of corruption on FDI inflows in 73 countries was examined (Castro and Nunes, 2012) Because they offer a more favourable environment for investors, the least corrupt nations may draw more foreign direct investment (Castro et al, 2013) By applying OLS to panel data from 17 Asian economies from 1995 to 2009, Alemu (2012) examined the impact of corruption on FDI influx According to the findings, a rise in corruption of 1% causes FDI inflow to drop by about 9.1 percentage points There were 82 nations represented in the cross-sectional data, both developed and developing (Ardiyanto, 2012) Using panel data, it was found that corruption had a negative impact on FDI inflows to rich nations but had a somewhat positive impact on FDI inflows to developing countries However, several scholars have looked into how FDI affects the level of corruption Lower levels of corruption are strongly correlated with FDI as a percentage of GDP The quantitative effect of FDI on corruption seemed to be on par with the quantitative effect of per capita GDP on corruption in terms of size d Main hypothesis Based on the support of the above theories, this report suggests an important link between corruption and labour market outcomes through the following hypothesis: Hypothesis 1: Low corruption level positively influences foreign direct investment It is obvious that corruption has a detrimental impact on foreign direct investment The result may, however, fluctuate slightly depending on the importance of trade openness In terms of trade openness, empirical studies show that if a country promotes its trade openness, it will lower corruption rates The strong correlation between the two factors was also highlighted in the majority of those studies Torrez (2002) supported the negative relationship between trade openness and corruption because quantitative trade limitations cause a shift in economic resources from directly productive activity to rent-seeking ones, including corruption Similar conclusions were found in other reports Corruption is adversely impacted by trade openness, which is determined by import, export intensity, and tariff barriers (Larraín & Tavares, 2000) Both the quality (the extent of trading partners’ corruption) and the level of openness (total trade estimated by imports and exports) have significantly constrained corruption 9 The relationship between Perceived Corruption and FDI in the G20 countries in the period of 2012-2021 regardless of the selection of a functional form, the corruption index, and the inclusion of additional relevant factors (Gokcekus & Knörich, 2006) Besides, one study offered a mixed result, saying that in environments with weak institutional frameworks, increased trade facilitation may be a practical and successful strategy for reducing corruption over the short term (Shepherd, 2009) Based on the analysis made by the previously mentioned arguments, the next hypothesis is established: Hypothesis 2: The negative impact of corruption on FDI is weaker in countries with high openness Figure Conceptual framework Methodology a Data selection • Database The data utilised in this analysis include annual statistics for the G20 nations' gross domestic product, foreign direct investment, and corruption perception index score from 2012 to 2021 The statistics for the world development indicators issued by the OECD are where the FDI and GDP figures are gathered Besides, the information on corruption is obtained from Transparency International's official website's corruption perception index This study utilised the score as a method to quantify corruption from the corruption index The range of scores is to 10 The maximum score, 10, denotes a 10 10 The relationship between Perceived Corruption and FDI in the G20 countries in the period of 2012-2021 Panel C - Means by countries characteristics log(FDI) Unemployment rate log(GDP per capita) CPI Infrastructure Openness Countries with High Openness 23.601 53.111 9.570 10.202 124.741 67.178 Countries with Low Openness 24.239 50 5.954 9.758 119.728 37 Difference -0.638 3.111 3.616 0.444 5.012 30.178 Notes: The definitions of the variables are provided in Table Table consists of the descriptive statistics for Foreign Direct Investment, Corruption (as shown by Corruption Perception Index), Income Per Capita (as shown by GDP Per Capita), Infrastructure and Openness Panel A and Panel B show values for countries with high openness and countries with low openness, respectively In our sample, FDI in countries with high openness is lower than in countries with low openness However, there is a situational reversal for Unemployment rate, Income per capita, and Infrastructure Moreover, countries with high openness have higher CPI (53.111 compared to 50), which indicates that they are slightly less corrupt than countries with low openness Panel C clearly indicates the differences in average for Foreign Direct Investment, Corruption, Income Per Capita, Infrastructure and Openness between two groups of countries 18 18 The relationship between Perceived Corruption and FDI in the G20 countries in the period of 2012-2021 Table Descriptive statistics of variables Notes: The definitions of the variables are provided in Table The overall sample is an unbalanced panel that consists of 200 country-year observations covering the 10-year period from 2012 to 2021 Variables Mean GDP growth SD Minimum Maximum 3.35 -9.895 10.986 5.289 2.4 33.559 18660.235 1,444 69,288 24.207 68.32 181.790 19.29 21 105 2.039 Unemployment rate 7.546 GDP per capita 26,559 Infrastructure 119.039 Openness 54.475 The table provides the descriptive statistics of control variables We can specify the standard deviation, minimum, maximum, mean, as well as the range of each control variable based on this For instance, the mean of Openness is 54.475, the standard deviation is 19.29, the minimum is 21 and the maximum equals 105 19 19 The relationship between Perceived Corruption and FDI in the G20 countries in the period of 2012-2021 Table Correlation coefficient matrix (1) (2) (3) (4) (5) CPI (1) 1.0000 GDP Growth (2) -0.1319*** 0.0627 1.0000 Unemployment Rate (3) -0.2011* 0.0043 -0.1454** 0.0400 1.000 GDP per capita (4) 0.7963* 0.0000 -0.2455* 0.0197 -0.2111* 0.0027 1.0000 Infrastructure (5) -0.1683** 0.0172 -0.2286* 0.0011 0.2302* 0.0010 0.0783 0.2702 1.0000 Openness (6) 0.1356*** 0.0555 0.0026 0.9713 -0.0274 0.6998 0.2430* 0.0005 -0.0465 0.5132 (6) 1.0000 *Significance at the 1% level **Significance at the 5% level ***Significance at the 10% level The pairwise correlation values between independent variables are displayed in Table The positive coefficient between GDP per capita and CPI represents the negative relationship between them, which means: A higher level of GDP per capita results in a lower level of corruption in a country In a journal published in 2020, Moiseev, Mikhaylov, Varyash and Saqib assert that the decline of corruption results from a society's gain in wealth rather than the other way around (increasing GDP per capita while lowering corruption), as stated Mustapha (2014) Additionally, in a panel data framework, Mustapha (2014) conducts a number of statistical tests to show that the corruption index has a negative impact on GDP per capita Similarly, we can easily find that a nation with higher openness has lower corruption, as the coefficient between them is positive The Journal of International Trade & Economic Development published in 2010 also used the simple regression line to show a negative relationship between openness and corruption This could be, again, considered as evidence supporting our second hypothesis 20 20 The relationship between Perceived Corruption and FDI in the G20 countries in the period of 2012-2021 Table Corruption and FDI Dependent variable: Log (FDI) CPI -0.059*** (0.010) GDP growth 0.201*** (0.050) Unemployment rate 0.023 (0.021) GDP per capita 1.791*** (0.213) Infrastructure -0.018*** (0.005) Openness -0.026*** (0.005) Constant 12.019*** (1.721) Year fixed effect Yes Observations 200 Adjusted R2 0.2937 *Significance at the 10% level **Significance at the 5% level ***Significance at the 1% level Table reports the impact of corruption on FDI and partially supports our first hypothesis: Low corruption level positively influences Foreign direct investment As far as we know, if the slope is negative, then there is a negative linear relationship between two variables In this case, we find that corruption goes the opposite way with foreign direct 21 21 The relationship between Perceived Corruption and FDI in the G20 countries in the period of 2012-2021 investment and the coefficients are statistically significant in almost all cases Specifically, the slope parameter of CPI is -0.059 indicating that the FDI will decrease by 0.059 if the CPI index raises score A similar interpretation can be applied to other variables in the table According to a journal written in 2006, a negative correlation between the CPI and FDI has to be interpreted as a positive relationship between corruption and FDI (Egger & Winner, 2006) Table The interaction between corruption and high openness Dependent variable: Log (FDI) CPI -0.084*** (0.014) CPI* High Openness 0.023* (0.012) High Openness -2.522*** (0.697) GDP growth 0.188*** (0.048) Unemployment rate -0.009 (0.021) Log GDP per capita 1.863*** (0.209) Infrastructure -0.022*** (0.005) Constant 12.504*** (1.655) Year fixed effects Yes Observations 200 Adjusted R2 0.347 22 22 The relationship between Perceived Corruption and FDI in the G20 countries in the period of 2012-2021 *Significance at the 10% level **Significance at the 5% level ***Significance at the 1% level Next comes the second hypothesis: The negative impact of corruption on FDI is weaker for countries with high openness Table shows the interaction terms between a dummy for trade openness and corruption Based on its median, we categorize the amount of trade openness as high or low Countries with trade openness scores higher than 56.5 are considered to have high openness As anticipated, the interaction term's slope parameter is negative and significant at the 1% level The results can be interpreted as follows: Holding all other factors fixed, the effect of perceived corruption on FDI is less pronounced for countries with high levels of trade openness Again, evidence supports our hypothesis Conclusion Foreign direct investment and corruption control have been topics of current interest, especially in the research field This leads to prompt attention for researchers to look at the factors that influence corruption and FDI The paper examines a theoretical framework that links the relationship between FDI and corruption in G20 countries With the process of examining journal paper and data, it has been found that corruption has a detrimental effect on FDI of G20 This research has consistent results with other findings We collected data from 200 observations in 20 countries in the G20, all of which are developed countries, during the period from 2012 to 2021 We applied multiple regression models to test the effect of corruption and other control variables on the FDI of G20 countries Firstly, with hypothesis 1, we discover that corruption has a negative relationship with foreign direct investment, and the coefficients are almost always statistically significant A low level of corruption has a beneficial impact on foreign direct investment, according to Table 5, which only partially verifies our initial premise The slope parameter of the CPI is specifically -0.059, meaning that if the CPI index 23 23 The relationship between Perceived Corruption and FDI in the G20 countries in the period of 2012-2021 increases by score, the FDI will also fall by 0.059 Other variables in the table can be interpreted in a manner similar to this Secondly, with the second hypothesis, after examining and analyzing the regression We have come to the conclusion that the negative impact of corruption on FDI is weaker for countries with high openness, as the results have been shown in table The interaction term's slope parameter is negative and significant at the 1% level, indicating directly that the effect of perceived corruption on FDI is less pronounced for countries with high levels of trade openness Highlight Low corruption level positively influences Foreign direct investment The negative impact of corruption on FDI is weaker for countries with high openness 24 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