According to De Jong & Bogmans (2011), corruption could be described as the abuse of a post of trust to attain an undue advantage. Hence, it entails the conduct of personalities on both sides, whereby one individual is abusing the trust position while the other aims at attaining unfair advantage from the abuse. Ideally, corruption doesn’t stop at country borders; hence, the reason multinational organizations continually bribe government officials to achieve significant business contracts. Corruption has become a significant factor that is hindering the investment among the MNEs. One way it has contributed to hindering investment is by encouraging unfair competition. Therefore, in this case, our focus will be on answering whether higher levels of corruption in the host country discourages investment by MNEs.
Ali et al. (2010) note that since the nineties, the number of FDI has grown exponentially, arousing scholars’ interest to determine the increased rate of FDI flows. Further, Ali et al. (2010) note that traditionally, economic factors were viewed as the paramount determinant of MNE flow, including labor cost, inflation, market growth, and access to natural resources. However, it was identified that institutional structures associated with a country also play a critical role in the flow of FDIs since they lower transaction costs. Still, it was determined that the quality of institutions in a country plays a significant role in attracting FDIs, as it entails the government’s stability, economic development, knowledge incorporation, lack of social tension, and compliance with the law (De Jong & Bogmans, 2011). Since corruption is viewed as the face of institutionally least developed environment. The existence of higher levels of corruption in a host country greatly discourages MNE’s investment for numerous reasons. Still, the differences in corruption levels are critical as they determine how MNEs will tackle social pressure; thus, it plays an essential role in attracting FDIs.
According to Bénassy‐Quéré et al. (2007), corruption tends to negatively impact organizational performance, which emerges due to institutional insufficiencies. A perfect instance would include the institutional gaps that propel levels of corruption. Such discrepancies are viewed as flaws in the host country’s legal system regarding law monitoring, compliance, and punishment of corruption offenses. Inadequate tracking and deficiencies in the institutional system are observed as catalysts of corruption. At the same time, sophisticated legal institutions serve as barriers to bribery, which formalize cost pertained to corruption in the form of fines (Ali et al., 2010). Therefore, the inefficiencies and institutional gaps associated with host corrupt countries greatly discourage investment, while sophisticated institutional frameworks attract investments and MNEs.
Furthermore, despite there being no clear argument indicating the impact of corruption in attracting MNEs. Scholars such as Galang (2012) urge that countries with higher corruption levels fail to attract FDIs because they don’t offer similar conditions in accessing the market as their competitors because preference will be provided to those willing to bribe. Still, arguments have emerged, proposing that corruption tends to facilitate business by overcoming institutional shortages. In such a scenario, it facilitates FDI but will only be efficient in countries with less developed institutions or inefficient regulations. However, a contradiction emerges in states with strict rules as the corruption constraints can serve as a friendly hand that encourages FDI investments.
Considering that arbitrary corruption exists in host countries, it tends to impact the decisions that FDI makes negatively. Cuervo-Cazurra (2008) notes that arbitrary corruption prevents MNE’s ability to make decisions when it comes to estimation. For instance, the likelihood and cost associated with the bribes. Besides, the possibility of different bureaucratic, legal, or political elements agents asking for bribes independently. This explains why arbitrary corruption tends to be referred to as “disorganized corruption” because of its bribery uncertainties and the mode it will take, the risk associated with the results attained from a bribe, and the possibilities of independent bribes. Hence, countries with lower levels of arbitrary corruption are expected to attract MNEs compared to those with high due to the uncertainty associated with operation.