Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

Abstract: Corruption is often portrayed as a barrier to trade and investment capable of altering international investment patterns. Here, we analyze how firms’ choice of country and the volume of offshored material inputs are affected by corruption in target economies. Taking stance from the gravity model of trade, the analysis suggests that corruption is a deterrent for offshoring. Firms avoid corrupt countries and, given that destination country has been chosen it reduces the volume of offshored inputs. The negative impact of corruption is largest in poor countries, and internationalized firms trading with many countries use their flexibility to avoid corrupt countries. Given the importance of these firms as international investors, this is yet another reason for why fighting corruption is important.

Keywords: Corruption; Offshoring; Gravity; Firm level data

JEL-codes: F23; L24

29 pages, December 1, 2010

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