This paper examines the relationship between corruption and foreign direct investment (FDI) inflows in European Union member states using a dynamic panel framework. Using an unbalanced EU panel from 2002 to 2022 and an Arellano–Bond difference-GMM specification, we model inward FDI inflows per capita as a function of institutional integrity (measured by Transparency International’s Corruption Perceptions Index), market size, development level, and trade integration. The results show a robust positive association between improvements in perceived integrity (higher CPI scores) and increases in inward FDI inflows per capita, conditional on macroeconomic controls and dynamic adjustment. Market size and trade variables have the expected signs, while GDP per capita is the empirically sensitive margin, consistent with the idea that higher development can indicate greater purchasing power but also higher costs and saturation effects in advanced economies. Robustness checks using the inverse hyperbolic sine transformation—suited to heavy tails, zeros, and negative net flows—confirm that the governance association is not an artifact of scaling. The findings highlight the importance of institutional quality and market openness as correlates of FDI attractiveness within the EU.
Mance et al. (Wed,) studied this question.