Answer

Debate Topic: Corruption does not Deter Foreign Direct Investment

                                                                   Introduction

              Foreign direct investment, (FDI) refers to an investment, which is made by a particular firm of an individual in one country, into a business interest, which is located in another country. Foreign direct investment relies so much on the diplomacy relationship that two or more trading countries have, as well as the economic policies guiding the cross border trades (Chauvet & Guillon, 2013). Generally, FDI takes place when an investor establishes a foreign business operations or acquires a foreign business assets, including establishment of ownership or a controlling interest in the foreign company. Establishment of interest in the foreign companies simply means that an individual purchases an interest of more than 30% in a company which is established in another country.  The main difference between foreign investment and portfolio, is that in a portfolio, an investor purchases  equities as part of this or her security, but does not participate the  in the decision making process for the subject company.

         Russia has recovered from the military coop, hence having both historical and political challenges to date (Wang & Youn, 2018). One of the challenges evident in Russia is Corruption. Recent survey has revealed that there is a rising level of corruption in Russia.  This has jeopardized business operations and also discouraged some investors. However, the Foreign Direct investors still continue investing this country.  This poses a question, on whether or not corruption in a particular country can discourage foreign investment. This paper therefore, analyzes this research gap, in attempt to answer this question.

Analysis of Corruption and FDI in Russia

          According to Mun (2016), Russia has had many challenges, owing to the political instability that the country experienced for a number of years. Having recovered from this, the country is obliged to take bold step to ensure that it reaches the level of its neighbors’ rate of development.   Russia borders North Korea and China which are renowned emerging economies in the global scale.

Foreign Direct Investment in Russia

        Among the European Transition and the   overall commonwealth Independent States (CIS), Russia is the largest country, which is very rich with natural resources such oil, has the highest level of skilled or educated labor force and has the largest potential and attractive market. Despite the above positive attributes, Russia has   never been attractive to the foreign investors.  This is paradox, which many scholars have not been able to fully understand, owing to the fact that the country has been able to recover fully from the political turmoil and also drastically recovered economically. Since collapse of the communism system in the year 1989, other Common Wealth Independent States, such as Czech Republic among others have been able to receive over 54.2% of the total foreign direct investment in the world.  Russia, however, has been able to receive only 9.57% of this total (Gillanders & Parviainen, 2018). Foreign direct investment (FDI), is a marginal phenomenon in the republic of Russia, as it accounts for less than 1% of the country’s Gross Domestic Product (GDP). This is can be attributed to the fact that, the country has been able receive a lesser value of FDI, than it’s potential.

           Empirical evidence suggest that the country which has been able to benefit most from Foreign Direct Investment is Netherlands (Mun,2016) This is due to the favorable macro-economic factors, which favor thriving of FDI in this country.   It is however, paradoxical that Russia has almost the same favorable macroeconomic variables just like Netherlands, but its level or value of FDI is much lower. It is worth to note that FDI has important stimulators of economic growth, through tax contribution, creation of employment opportunities and enhancement of innovation and creativity levels.   Past literature review done, proves that the causality between FDI and economic growth is not obvious. However, the link between FDI and the emerging economy, such as Russia is very important. Transitional countries which offer competitive e conditions for production and innovation, tends to be attractive to FDI. FDI on the other hand, improve productivity, promote international trade, and experience economic growth. 

Characteristics of FDI in Russia

  Sources and Data

            In the Russian statistics Foreign Investment (FI) included three categories, namely portfolio investment, foreign capital and other investment largely composed   trade credits and bank deposits.    The main characteristics of FDI are as follows:

• FDI is not the main entry for the foreign investors, as foreign investors prefer trade credit and bank deposits to FDI.
• FDI was concentrated in the 1990s in major sectors such as transport and oil. However, towards 2000s the trend fell drastically (Chauvet & Guillon, 2013). However, the rate of FDI in Russia during these years, were still lower than the rates in other commonwealth countries. These among others are the characteristics of FDI in Russia.

Corruption in Russia

            Corruption has been one of the constant factors in the Russian economic and political world. Russia has numerous forms of corruption, which has made it difficult for the country to fight this enemy of development. The election of the new leadership, led by president Putin in the 2000, brought in a new synergy in the fight against corruption. However, far from elimination of corruption, the politics of this new leadership is said to have merely transformed the corruption type in Russia. It is argued by many people that, unlike the former corruption forms which were majorly horizontal, this new leadership has come up with a vertical corruption form.

            In the recent years, corruption has played a great role in the current government’s stability. The government has been able to micro-manage the activities of the   country and of the government as well as the activities of the nation (Qian & Sandoval, 2016). Corruption in Russia has jeopardized the smooth business operations, as well as the possible thriving of investments. High level of petty corruption is very common in Russia, especially in the judicial system. This is absurd, as the judicial system is usually endowed with the responsibility of ensuring that justice is upheld for the citizens.  Other than the country’s judicial system, the public procurement sector, also has a run a way level of corruption.  This has led to a skewed tender awarding, hence benefit only to the chosen few and not the Russians at large. The business environment in Russia, is one of the most consistent in the globe. Application of business laws is not consistent and there is no transparency revolving investment ideas an operations.

             Based on the above inconsistency, there is very little accountability, both in the business which relates to the government, as well as the private investors.  The conditions regulating the business operations in Russia are neither standard nor consistent, leading to a high level of efficiency.  Consequently, the market has not been able to tame the unfair competition in the market, as people are at liberty to break the set laws at their will, since they are not consistent. The Russian Anti-Corruption law, requires that the companies implement fully and actively the Anti-corruption compliance programs. However, compliance is lagging behind, as influential people are able to find the business way, even without full and proper compliance. The Russian business law states that active and passive bribery, facilitation of payments, gifts and other forms of benefits are culpable. However, full enforcement of this law is yet to be realized, as the weak ant-corruption system and legislation have been a great hindrance. Politicizing of war on corruption has also been another hindrance in fighting corruption in Rwanda.

Effects of Corruption on FDI

            From the above evidence, it is clear that corruption cannot be directly attributed to the negative growth of FDI in Russia.   The following are some   of the facts, ascertaining that there is direct negative effects or corruption in FDI.

FDI is a Diplomacy Matter

             Foreign direct investment is contributed more to, by the diplomacy relationship. Diplomacy issue does not relate to corruption, which is essentially a home affair matter (Gillanders & Parviainen, 2018).  Countries whose level of corruption is much higher than that of Russia, such as Nigeria, have their FDI being higher than that of Russia.  Direct investments are negotiated through the top leadership of the countries, and not the business registrars locally. In Russia for instance, the economy is attractive, but it has not been able to attract foreign investors.  It is worth to note that corruption, has nothing whatsoever, with the diplomacy relationship. Corruption level is its effects is an internal affairs matter.

Foreign Invested Funds Do Not Pass through the Hand of Natives

              All the invested amount in the foreign direct investments as well as the day to day operations, are usually in the hands of the  investors, who happens to be non-citizens. This gives no room for the money to be embezzled, even in a country, whose corruption level is high like Russia. At the end of the year, all the financial statements of FDI’s are reported to the foreign investor. The foreign investor is at liberty to have an independent auditor to audit their firm. This is an indication that these investments are purely operated and managed by the investor and not necessarily the local system and people who might compromise it.

Corruption only Increases Risks of Locally Sourced Capital

           Capital is a major factor when venturing into business opportunity.  Corruption can jeopardize access to capital, especially if certain group of investors are interested in dominating a certain industry eyed by the potential investor (Smith & Thomas, 2015). FDI capital on the other hand, is either partly generated or fully generated by a foreigner, who cannot be limited whatsoever by the internal corruption.  In a venture in which in which the investor has interest, and not fully owned, there will be a diplomacy agreement, which are coordinated by the government, in collaboration with the investor. In this coordination, there is no vacuum for negative effects of corruption, as nations are always interested in protecting the international image.

Foreign Direct Investments is Not Tied to Local Market

         Unlike local investments which are dependent on the local markets, FDI products can either be sold locally or in the global market (Smith & Thomas, 2015).  The host country typically hosts the producing or manufacturing company, due to conducive environment which exists. However, the market of the goods produced can be diversified, with an aim of maximizing earnings. Russian marker could be affected by the level of corruption.   For example, a price may be set, which favors the products produced by the company owned by certain individuals. In such a case, the foreign is at liberty to transport the goods already manufactured to another market. This can be done either to diversify risk levels, or to avoid the local market, which is affected by corruption. FDI in Russia for instance, can sell their products in the surrounding markets, and still maximize profit.

Conclusion

           From the above analysis, it is possible to conclude that corruption does not deter Foreign Direct Investment (FDI). This is due to the fact that, FDI are not directly linked to the local operations, which may be corrupt.  The low rate of FDI investments in Russia are therefore, not affected by the level of corruption, but other factors, such as capital risks, favorable environment, market volatility among others. This subject however, should be researched further, to ascertain further this fact.