Foreign Direct Investment, Corruption, and Crime

Abstract

Drug trafficking could be associated with the corrupt structures of governments and any anti-drug enforcement policy would be compromised. At the same time, it is perceived that the flow of foreign direct investment, which is inversely related with drug trafficking, drives the economy and the host government faces a dilemma between encouraging foreign direct investment or allowing drug trafficking. In this chapter, a theoretical model of this stylized fact is made. It is found that the host government sets a strict enforcement policy if the corruption level is low; otherwise, a lax policy would be set. Once the enforcement policy has been set, an increase in the corruption level reduces the enforcement level. Additionally, an increase in the demand for drugs may reduce or increase the enforcement level depending of the size of corruption level compared with the market size for foreign investors. However, with an international specific policy, an increase in demand of drugs reduces unequivocally the optimal enforcement level.