Using data on a matrix of bilateral FDI from 14 source countries to 41 host countries, I estimate the magnitude of the negative effect of corruption relative to that of corporate income taxes. The corruption measures are based on perception indexes estimates by Business International, International Country Risk Group, and Transparency International. I find that a worsening in the host government's corruption level from what prevails in Singapore to what prevails in Mexico has the same negative effect on inward FDI as raising the marginal tax rate by 42 percentage points. A possible explanation for the difference in the estimates is that severe corruption is precisely the reason that small and faraway source countries don't bother to invest in these countries. In my sample, while the U.S. firms appear to be more averse to corrupt host countries than firms in the other major source countries, the difference is not statistically significant.
China appears to be a puzzle.
On the one hand, there is rampant corruption there. On the other hand, foreign investors appear to rush into China. Of course China is a large country, with a vast supply of cheap labor, and has been growing faster than the world average. These are reasons that Chinese inward FDI should be large in absolute terms. Indeed, there is some evidence that China may even be a substantial underachiever as a host country for FDI from these countries.