Leveling the Playing Field for Everyone? Large-scale Anti-corruption Campaign and Foreign Direct Investment, with Evidence from China

Abstract

Anti-corruption efforts in authoritarian regimes are often seen as insincere charades or tools used for intra-elite struggles and factional purges. This paper advances an alternative view that considers their substantial effects. I argue that authoritarian anti-corruption efforts can have positive effects on foreign direct investment (FDI) by disciplining officials and improving the environment for foreign investors. I substantiate this claim by examining how China's anti-corruption efforts and in particular, the ongoing large-scale anti-corruption campaign launched by Xi Jinping influence FDI inflow to China. Theoretically building a formal model and empirically using an original province-origin-level panel dataset for the period from 2008 through 2019, two-way fixed effects models, and a difference-in-differences strategy, I show that anti-corruption efforts are conducive to FDI inflow to China and such positive effects are more significant when the effort is in large-scale. Yet Xi's campaign has a non-differential effect on foreign investors from different origins. I propose three explanations for this non-differential effect: the effectiveness of the OECD Anti-Bribery Convention, the sincerity of Xi's campaign, and pre-campaign perfect price discrimination. These findings highlight the substantial effect and limitations of authoritarian anti-corruption efforts.