My recent research suggests that there may be a natural link between the two that has not been explored fully. A quick look at selected countries suggests that this hypothesis is plausible. During the early 1990s, New Zealand and Singapore had low levels of corruption and also substantially more inward FDI than foreign bank borrowing. On the other hand, Uruguay and Thailand were highly corrupt and also had substantially less FDI than foreign bank borrowing. This is consistent with the hypothesis that corruption and the composition of capital flows are connected.
Corruption is at least annoying to both international banks and direct investors.
Relative to international bank lending, direct investment involves a higher sunk cost ex post and more repeated interactions with host-country government officials. This ex post vulnerability makes international direct investors more averse to corruption. Furthermore, the current international financial architecture is such that international bank credits stand a far better chance to be bailed out than international direct investment. Both of these reasons would affect the composition of the capital inflows into a corrupt country away from FDI and towards bank credits, hence increasing the likelihood of a future currency crisis. I collected data from the Bank for International Settlement and the OECD on bilateral bank loans and bilateral FDI during 1994-6 for all country pairs for which such data are available.