Birds of a feather: Evidence on commonality of corruption and democracy in the origin and location of foreign investment in Russian regions

- We model location decisions of foreign firms in Russia.
- We examine subnational corruption and democracy as location determinants.
- We examine home country corruption and political regime as location determinants.

We examine the effects of subnational variations in corruption and democratization on the location decisions of foreign investors in Russian regions using firm-level panel data for the period 1996-2007. We link these effects to the level of corruption and type of political regime in the country of origin of a foreign investor. We find a relationship between attributes of foreign investors' home countries and attributes of the regions in which investment takes place: foreign investors from less corrupt and democratic countries tend to invest in less corrupt and more democratic Russian regions, whereas those from more corrupt and non-democratic countries tend to invest in more corrupt and less democratic regions. An inference is that, in Russian regions with high corruption and with autocratic government, foreign direct investment appears driven by the personal interests of controlling regional political elites who collaborate for mutual gain with foreign investors from corrupt and autocratic countries. Our results suggest a general conclusion that origin and location of foreign investment are linked by common political culture.