Corruption and FDI in Brazil: Contesting the “Sand” or “Grease” Hypotheses

Abstract

Foreign Direct Investment (FDI) is seen as a significant driver of economic growth and a potential ally in the struggle against poverty and inequality, making emerging countries focus on attracting this type of investment. Thus, understanding factors that impact the concentration of regional FDI is essential to verifying which characteristics encourage or deter foreign investment. Likewise, the literature has explored institutional factors such as corruption as determining factors for the concentration of FDI. Within this framework, this study aims to empirically examine the sensitivity of multinational enterprises (MNEs) to corruption. Few studies have been carried out on this subject, mainly in Latin American economies. We employ a unique Brazilian municipality-level FDI database to investigate whether corruption hinders (i.e., corruption acting as “sand”) or promotes the concentration of foreign investment (i.e., corruption acting like “grease”). Additionally, we believe that analyzing different economic sectors is essential to deepening the knowledge about the impacts of corruption on FDI. Our results show that corruption acts as “grease” for both overall FDI and at the level of individual sectors. Finally, when taking a non-linear approach, our findings show that corruption acts as grease for FDI only in regions with intermediate (medium–low) levels of corruption.