The effect of corruption on growth and investments: Exploring the direct and indirect effects of corruption on growth via three different investment channels in low income countries

Abstract: This thesis investigates both the direct effect and indirect effect of corruption on growth via three different investment transmission channels. According to growth theory, different types of investment are commonly considered as important contributors to economic growth. Therefore, this study aims to examine the indirect effect of corruption on growth via following investment transmission channels: domestic investment, foreign direct investment (FDI) and human capital investment. Since poor countries are both in general more exposed to corruption and in need of investments, the direct and indirect effect of corruption on growth are tested in low and low-to-middle income countries, during a time period of 1996- 2011. The direct and indirect effect of corruption is tested through conducting four different multiple regression analysis with panel data. Thereafter this thesis aims to put together these effects to determine the total effect of corruption on growth. However, the latter was not conducted since our result shows no strong significant effect of corruption on growth, neither direct or indirect. Although a weak significant negative of corruption on human capital investment is indicated. Our result is not in line with previous research, which might be explained by the properties of our country sample, the econometric method and a possible need of interaction variables. However, corruption should still be considered distortive for countries and societies and a greater understanding of the significance of transmission channels and interaction between corruption and other variables is needed.