Beneath the Veil of Hope: The effects of EU signaling on foreign investors’ sensitivity to corruption before and after EU membership

no, author (2015) Beneath the Veil of Hope: The effects of EU signaling on foreign investors’ sensitivity to corruption before and after EU membership. [Conference Proceedings] (Submitted)

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Abstract

Introduction: The litereature on the effects of corruption on Foreign Direct Investment (FDI) does not point to a conclusive causal logic. Some studies show that high corruption discourages FDI since it is perceived as an additional tax on doing business. Others suggest that it is irrelevant and other factors matter more. Still others argue that it can actually help FDI since it “greases the wheels” of the system. Looking at the relationship between corruption and FDI in the context of the 12 countries which joined the EU in 2004-07 one can make a puzzeling observation (Chart 1). During the pre-accession phase, despite the fact that corruption control was poor over long periods, FDI kept steadily increasing. Post-membership, however, deteriorating corruption control was punished by foreign investors and corruption and FDI were more closely correlated. Why did investors shift from disregarding it to being sensitive to it? In light of the established effect of EU signaling on investor confidence in CEE (Bevan and Estrin, 2000; Gray, 2009), I hypothesize that (1) positive signaling during the pre-accession process trumped other important factors for FDI, such as corruption; (2) these factors then resurfaced after membership was granted (and signaling was over) and had the expected impact on investor confidence

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