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IMPACT OF CORRUPTION ON FOREIGN DIRECT INVESTMENT AND TAX REVENUES ON D-8 COUNTRIES

A. Background
Transparency International (TI) has ranked various countries in terms of corruption since 1995. This attempt by TI to quantify perceptions of corruption (CPI) has lately nourished a significant number of research studies which investigate the various features and ramifications of this phenomenon that afflicts developing as well as developed countries around the world. My comparative analysis of CPIs from 2009 to 2012 suggests that the relative ranking of countries as far as perception of corruption is concerned does not change from year to year. In general, developing countries are being perceived as more corrupt than developed nations. In addition to studying the CPIs themselves, we use CPI rankings for 2009 to determine the impact perception of corruption has on the flow of foreign direct investment (FDI) into a country. The model used in this paper to explain determinants of FDI includes both locations as well as economic variables took into account only location factors. I use multiple regression method to empirically test the model. Then simulate the impact of a three-point improvement in CPI scores on FDI flows to developing countries in our sample. Most importantly, using countryspecific rates of return on US investments abroad as the benchmark rates, we estimate the additional taxable income that each country would generate by reducing corruption, which in turn would raise tax revenues that can be added to government coffers. In short, it would not stop at establishing the link between CPI and FDI. Then go further and simulate the impact of lower corruption on investment, income and tax collection. Note that this is the benefit to revenues

from a reduction in the generalized level of corruption. Additional benefits will accrue from a reduction in corruption in the collection of taxes. The empirical results show that the more corrupt a country, the less is the inflow of FDI. A lower amount of FDI further handicaps the efforts by developing countries to close the gap between domestic savings and investment. The inflows of FDI not only assist in the easing of balance of payments constraints, but also provide revenues to the government. FDI helps generate taxable income, which like income from domestic investment can be taxed by the host government. By discouraging FDI, corruption ends up impacting revenues available for development. The paper will review relevant literature; describe the methodology used for our analysis and set out the data sources used in our research; specify and estimate an empirical model; and finally report the simulated impact of a three-point improvement in CPI scores on FDI flows, return on investment and taxable revenue for the 8 developing countries included in our sample. 1. Problem Statement Based on the problem background above, the problem statement in this study are: a. How Corruption Perception Index (CPI) to Foreign Direct Investment (FDI) in D-8 Countries? b. How the improvement in Corruption Perception Index impact on FDI flows and corporate tax revenue? 2. Research Scope

In order to keep this study focused and not get wider, the researcher limits the scope of this study are as follows: a. This study analyzes the impact of corruption on FDI and Tax Revenue in D-8 countries. b. The time frame of this study is 3 years from 2009 2011. c. The researcher use Annual Corruption Perception Index year 2009 2011 as measurement tool to measure corruption. 3. Objective of the Research The objectives of this research are: a. Analyze the impact of Corruption Perception Index (CPI) to Foreign Direct Investment (FDI) in D-8 Countries. b. Analyze the impact of Corruption Perception Index on FDI flows and corporate tax revenue. 4. Benefit of the research The benefits of this research are: a. For the Reader This research will give the reader a source of reference about the impact of corruption on FDI and Tax Revenue to have a better understanding about the relationship between those 3 variables, and the impact in D-8 countries.

b. For the Author This research is useful to add a new insight about the impact of corruption in a develop country on FDI and Tax Revenue. c. For the other researcher This research might become one of the source of literature for other researchers, and gives additional insight. B. Research Report Outline For ease of understanding in this study, the writer make the design in this study consisted of: Chapter I: Introduction This chapter provides the introduction about the research that consists of research background, problem statement, scope of the research, objective and benefits of the research, and research report outline. Chapter II: Theoretical Background and Previous Research Chapter II contains the theoretical basis and the formulation of hypotheses, explanations of the theories that are used as the basis for research, previous scientific research, and the hypothesis developed in this study. Theoretical background related to Corruption Perception Index, Foreign Direct Investment, and Tax Revenue. Chapter III: Research Methodology Chapter III will be detailed explanations of the data population and data sample, sampling methods, types of research, data collection methods, sources of data, data

analysis methods and hypotheses models used in the research. On the research methodology part of the study describes the test steps from beginning to end. Chapter IV: Data Analysis Chapter IV contains data about D-8 countries Corruption Perception Index, the calculation of FDI and Tax Revenue, how the data obtained and collected, and data analysis as a test of the hypothesis in the study. Data analysis carried out on Corruption Perception Index as the independent variable of FDI and Tax Revenue as the dependent variable. Chapter V: Conclusion This last chapter contains the final conclusions of the study, the presence or absence of the influence of CPI to FDI and tax revenue. In addition, this chapter also contains a limitation of the study, and suggestions for further research. \

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