The Impact of Perceived Corruption Index on Foreign Direct Investments in Africa

Abstract: This thesis evaluates the impact of corruption perception index (CPI) on foreign direct investment (FDI) flows from China and 34 OECD source countries to 54 African host countries using the gravitational model. China is of particular interest as it has become Africa’s largest trading partner as well as the greatest investor among the developing countries in Africa, in addition to Chinese firms having increased their presence in African countries rich in natural resources and poor infrastructure where the scope of corruption is considerable. The thesis’s results indicate that higher perceived corruption in an African country negatively impacts FDI flows originating both from OECD countries and China, supporting the “sand in wheels” view that corruption is detrimental to economic growth. Whether countries that are more similar to Africa with regards to the level of corruption invest more was further analyzed as it could be hypothesized that an investor with experience of dealing with corruption at home might be less reluctant to invest in other countries with high levels of corruption. The results for the variable absolute difference in corruption levels, however, imply no statistically significant effect and thus no evidence supporting the notion that foreign firms investing more in African countries with similar corruption levels. The negative results between CPI and FDI flows suggest that implementation of preventive measures combating corruption should be made a top policymaking priority in Africa.