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BUSINESS AND ECONOMICS RESEARCH JOURNAL

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Article Information
Journal: Business and Economics Research Journal
Title of Article: The Effects of Corruption and Democracy on FDI in Developing Countries: An Empirical Investigation
Author(s): Ahmet Ay, Oktay Kızılkaya, Tuba Akar
Volume: 7
Number: 3
Year: 2016
Page: 73-88
ISSN: 1309-2448
DOI Number: 10.20409/berj.2016321809
Abstract
In this paper, the effects of corruption and democracy on foreign direct investments are examined empirically for 10 developing countries over the period 1995-2013. Panel unit root tests, panel cointegration test, panel FMOLS estimator, and panel vector error correction causality methods are employed in the paper. According to the findings, there is a cointegration relationship among corruption, democracy, and foreign direct investments. Decrease of corruption and increase of democracy level, affect foreign direct investments positively in 10 developing countries which constitute panel, in accordance with evaluating estimate results of cointegration coefficients. According to the findings obtained from the causality analysis, there is unidirectional causality from corruption to foreign direct investments in the short run while there is unidirectional causality from corruption and democracy to foreign direct investments in the long run. These findings support the hypothesis which argue that democracy and corruption have significant effects on foreign direct investments. Today, it can be seen that foreign investors test the trustworthiness of political regime in host country. Reviewing policies towards foreign investors appears as a substantial factor for host countries.
Keywords: Corruption, Democracy, Foreign Direct Investments, Developing Countries, Panel Data Analysis
JEL Classification: D73, C33, D72, F23

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