Corruption experience and foreign investments: clean hands or dirty hands learning?

Abstract

Host-country corruption discourages multinational firms’ foreign investments. Nonetheless, multinationals may still want to invest to benefit from local business opportunities. To deal with the challenges of operating in a corrupt host country, they can use experience gained in other corrupt countries. We distinguish between “clean hands” and “dirty hands” learning about corruption – that is to say, learning how to avoid bribing, or learning how to pay bribes and avoid traceability. We disentangle these two competing mechanisms, which were confounded in previous studies, by assessing how home-country enforcement of laws against bribery abroad modifies how prior experience in corrupt countries mitigates the discouraging effect of host-country corruption on investment. We propose that, under clean hands learning, home-country enforcement strengthens the mitigating influence whereas, under dirty hands learning, home-country enforcement weakens this influence. Results from analyzing the location choices made by 25,067 multinationals from 97 countries for their 91,371 greenfield investments in 101 countries from 2008 to 2016 reveal that corruption experience mitigates the discouraging influence of host country corruption but that home country enforcement of laws against bribery reverses this influence. This is consistent with the view that dirty hands learning prevails over clean hands learning.