Illicit Money Flows as Motives for FDI

Journal of Comparative Economics, Forthcoming

Posted: 6 Dec 2009 Last revised: 28 Jun 2014

See all articles by M. Fabricio Perez

M. Fabricio Perez

Wilfrid Laurier University - School of Business & Economics

Josef C. Brada

Arizona State University (ASU) - Economics Department

Zdenek Drabek

World Trade Organization (WTO); Institute of Economics and Statistics; CERGE-EI

Date Written: March 25, 2011

Abstract

We examine the role of FDI in facilitating money laundering and illegal capital flight, focusing on transition economies’ FDI outflows because they largely reflect current investment decisions rather than the inertia of past decisions. We estimate a model of FDI outflows in which illicit money flows influence the volume of FDI directed toward countries considered to be centers of money laundering. We show that traditional models of FDI are not able to account for these investment flows and that our results are robust when additional explanatory variables such as host country tax rates, governance, corruption, and cultural differences between the home and host country are included in the model. We estimate that 6 to 10% of total FDI outflows and over 20% of FDI to money-laundering countries from our sample were made to facilitate illicit money flows.

Keywords: foreign direct investment, capital flight, money laundering

JEL Classification: F21, F23, F32, F02

Suggested Citation

Perez, Marcos Fabricio and Brada, Josef C. and Drabek, Zdenek, Illicit Money Flows as Motives for FDI (March 25, 2011). Journal of Comparative Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1518545

Marcos Fabricio Perez (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada
519-884 0710 (Phone)
519-884 0201 (Fax)

HOME PAGE: http://www.public.asu.edu/~mfperez/

Josef C. Brada

Arizona State University (ASU) - Economics Department ( email )

Box 873806
Tempe, AZ 85287-3806
United States
602-965-6524 (Phone)
602-965-0748 (Fax)

HOME PAGE: http://www.mesharpe.com/eee_main.htm

Zdenek Drabek

World Trade Organization (WTO) ( email )

154 Rue de Lausanne
CH-1211 Geneva 21
Switzerland
+41 22 739 52 74 (Phone)
+41 22 739 57 62 (Fax)

Institute of Economics and Statistics ( email )

Opletalova 26
Prague, 11000
Czech Republic

CERGE-EI ( email )

Politickych veznu 7
Prague, 111 21
Czech Republic

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