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REPORTED in this paper was inspired by a plane ride I took from China to the United States in 1996. Browsing the newspapers and in-flight magazines, I came across one story about the high level of official corruption in China, and another that extolled the extraordinarily large flow of foreign direct investment (FDI) into China that year. 1 Later in the flight, I struck up a conversation with the passenger sitting next to me, an American business executive who had just visited his joint venture firm in China. I asked him whether the corruption problem in China affected him and his business. He said that it did and went on to explain the myriad problems that his firm had encountered in dealing with corruption and bureaucratic red tape.
Shang‐Jin Wei (Sat,) studied this question.