Abstract
Why and how foreign investment may flow into corrupt host countries? The present paper provides new evidence that, ceteris paribus, corruption may yield differential effects on foreign investment in a group of central and eastern European (CEE) countries depending on the level of business regulations, home-host corruption similarity or EU/OECD membership link. Using a large home-host matched firm-level panel data for the period 2002-08, we show that foreign ownership may increase with corruption in the presence of business regulations and home-host corruption similarity, both of which may facilitate business transactions in the presence of host corruption. In contrast, the corruption variable is no longer significant when home and host countries share a common border that may promote cross-border trust because of greater familiarity (relative to remote corrupt host countries). As such the paper identifies some specific mechanisms to show why higher corruption may not necessarily deter foreign investment in the CEE region