Abstract

Kicking Back against Kickbacks: An Examination of the Foreign Corrupt Practices Act and US Foreign Investment

Abstract: This paper studies the effect of the United States (US) Foreign Corrupt Practices Act (FCPA) on US multinational firms’ foreign direct investment (FDI). Unlike prior studies that focused on the passage of the FCPA, our study examines how the actual enforcement of the FCPA affects firms’ foreign investment decisions. We show that initial FCPA enforcement in a host country triggers MNEs to reassess their likelihood of being targeted, which in turn has a strong deterrence effect on subsequent US FDI growth in the host country. This deterrence effect is stronger for host countries with a weaker rule of law and more severe corruption issues. We did not find evidence of significant FDI relocation due to FCPA enforcement. Together, these results provide a comprehensive evaluation of the implications of FCPA enforcement in the global market for FDI.