The impact of money laundering and corruption on inward foreign direct investment in the European Union

Abstract

The aim of this dissertation is to analyse the relationship between Foreign Direct Investment inflows and money laundering and corruption across the Member States of the European Union. This analysis is carried out by making use of a panel data regression applied to a regression model built in this dissertation on the basis of past literature and economic theory. In order to value the level of money laundering and corruption in an economy, two indices were used, whereby the Basel Anti Money Laundering Index is used as a measure of money laundering opportunities in a country and an index based on the Worldwide Governance Indicators is used to measure the level of corruption. Additional independent variables were also made use of as controls, which are the real Gross Domestic Product per capita, an index of productivity, the effective tax rate, the lending rate (weighted by the country’s associated risk of their national bonds), and a dummy variable representing the COVID-19 pandemic. The model is first estimated via the pooled Ordinary Least Squares methodology and later via the Fixed Effects estimation. To gain a full understanding and to ensure acceptance of the research hypothesis the model is run several times and in different forms. Primarily, the model is run in its baseline form, and subsequently, in its relative form. The relative form of the model implies that the independent variables used as controls are transformed into the deviation from the European Union mean. Robustness checks are also performed, whereby certain control variables are switched with others in order to show the robustness of the results. Subsequently, a second line of investigation is performed whereby the model is applied to specific groups of countries only, with the first group featuring only countries experiencing low FDI levels and the second group featuring countries experiencing high FDI levels only. The results for the models making use of the EU-wide dataset all accept the research hypothesis and show a significant and negative relationship between FDI and both money laundering and corruption. The second line of investigation notes that the research hypothesis is only partially accepted in either group, with only corruption negatively affecting FDI inflows in the high FDI group and only money laundering negatively affecting FDI inflows in the low FDI group.