Governance and the Relationship between Corruption and FDI in Africa: A Threshold regression analysis

Abstract Research on the institutional environment, corruption, and FDI highlights an important facilitating relationship between these factors. Competing views on the effect of corruption on FDI vis-à-vis the grabbing hand vs. the helping hand hypotheses has been examined in the literature. It has also been suggested that both hypotheses can co-exist under the assumption that the FDI-corruption relationship depends on the level of institutions. This study revisits this relationship for 34 African countries over the 2005 to 2019 period using the dynamic panel threshold model, which allows for an endogenous threshold variable. In the past, studies that have examined this relationship using a threshold regression approach are either not based exclusively on African countries (where the implication of this relationship is more salient) or use a threshold regression that assumes exogeneity of the threshold variable. This study examines the facilitating nature of various governance measures – political stability, government effectiveness, rule of law and regulatory quality – on the corruption-FDI relationship. The results indicate significant threshold effects. It also shows that while the grabbing hand hypothesis is consistent with the data irrespective of the institutional proxy used, the helping hand hypothesis is sensitive to the choice of governance. These results agree with the strand of literature in support of a weak helping hand hypothesis. JEL classification: C33, E22, F21, K42, P37