Essays in Political Economy
Edited by Susan Rose-Ackerman and Paul Lagunes
Chapter 9: A corruption, military procurement and FDI nexus?
Corruption in military procurement is a very serious problem (see, for example, Willett 2009; Auriol 2006; Gupta, de Mello and Sharan 2001), particularly for developing economies that have experienced the greatest increase in military spending since the Cold War. Corruption of any form arguably stifles economic development. Yet, a recent paper by Daniel Drezner and Nancy Hite Rubin (2014) provides a possible refutation of this notion. In their global analysis of post Cold War military spending, they find that countries that are perceived to be corrupt actually attract more foreign direct investment (FDI) when they spend more on their military. The authors attribute their robust empirical finding to the geoeconomic favoritism hypothesis. This is the idea that military spending signals to foreign investors that FDI property rights are more secure. Could it also be the case that military procurement, a key component of military spending, stimulates FDI? Drezner and Hite Rubin’s finding that military spending attracts foreign capital only into corrupt economies is worth further discussion. In this chapter, I explore the relationship between corruption and FDI with an emphasis on how corruption may play a role in arms procurement. I build from Drezner and Hite Rubin’s previous finding that aggregate military spending leads to higher FDI, and look more closely at the relationship between major arms transfers and subsequent FDI in corrupt states.
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