Corruption and Private Participation Projects in Central and Eastern Europe

This paper investigates the role of host-country corruption in private participation projects in emerging markets. Privatization activities, especially in infrastructure development, were traditionally inaccessible to multinational enterprises, but they are nowadays encouraged in many countries. Prior literature on corruption finds two contradictory (“grease” and “sand”) results when examining the consequences of corruption on investments. Drawing on a sample of 1185 projects from 1997 to 2013 in 18 Central and Eastern European Countries, our results show that higher levels of host-country corruption are associated with greater probabilities of failure. Our results also show that including local investors in the ownership structure of the project weakens the negative effect of corruption by reducing the liability of foreignness. In contrast, being a publicly traded project has no moderating effect in the effect of corruption in this region. Therefore, our results highlight that not all common strategies to deal with corruption are equally effective in this region