Media corruption perceptions and US foreign direct investment

Journal of Media Economics ISSN: (Print) (Online) Journal homepage: https://www.tandfonline.com/loi/hmec20 Media corruption perceptions and US foreign direct investment Mohammad Refakar & Jean-Pierre Gueyie To cite this article: Mohammad Refakar & Jean-Pierre Gueyie (2021): Media corruption perceptions and US foreign direct investment, Journal of Media Economics, DOI: 10.1080/08997764.2021.1906689 To link to this article: https://doi.org/10.1080/08997764.2021.1906689 Published online: 01 Apr 2021. Submit your article to this journal View related articles View Crossmark data Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=hmec20 JOURNAL OF MEDIA ECONOMICS https://doi.org/10.1080/08997764.2021.1906689 Media corruption perceptions and US foreign direct investment Mohammad Refakara and Jean-Pierre Gueyieb Department of Finance, University of Sherbrooke, Sherbrooke, Canada; bDepartment of Finance, University of Quebec at Montreal, Montreal, Canada a ABSTRACT Media play an important role in shaping people’s beliefs and ideas. More specifically, media have a great influence on what we think about foreign countries. The media influence the way a country’s citizens view the people and governments of other countries and shape our image of them. All types of articles about foreign countries are covered in the media. Investors looking to invest abroad certainly pay attention to what is reported in the media about corruption in other countries. Since corruption plays a huge role in investment decisions, this paper investigates the role of corruption coverage in Wall Street journal on US foreign direct investment outflows. We find that an abundance of corruption stories about a specific country in The Wall Street Journal can demotivate investors and reduce the amount of US foreign direct investment outflows to that country. Introduction Media play an important role in shaping people’s beliefs and ideas. Media are increasingly recognized as key players in investment and financial markets as distributors of information. A recent strand of literature in finance has focused on the influential power of the media on the investor’s behaviors and find that media can affect stock prices, stock market reactions, trading volume and volatility, firm performance, cost of capital and entrepreneurs’ investment decisions (DellaVigna & Gentzkow, 2010; Engelberg & Parsons, 2011; Peress, 2008; Peress, 2014; Rizzica & Tonello, 2015; Tetlock, 2007; Tetlock, 2015; Tetlock, Saar-Tsechansky, and Macskassy, 2008). Moreover, we depend on media to get information about other countries. By reporting knowledge, facts and opinions about other nations, media significantly influence what we think about foreign countries, their people, and governments (Kunczik, 1997). To date, no attention is focused on the role of media in investment location decision, although the other effects of media in the finance literature have been studied. Corruption is an important factor for the investment location because investors prefer to invest in less corrupt countries. What the media are reporting about the foreign countries’ corruption can affect the decision of investors who are considering investing in those countries. Thus, media stories about corruption about the host country could influence the investment decision and amount of investment toward that country. This is the first study that investigates the role of the Wall Street Journal (WSJ) on US foreign direct investment (FDI) outflows. We construct a media variable to gauge the perceptions of the WSJ on countries’ corruption: Media Corruption Perceptions of The Wall Street Journal. The variable is the ratio of the number of stories that cover corruption of a specific country to the number of stories that cover trades and business in that country for each year. Using a panel of 47 countries spanning from 2000 to 2015, we find that the media have a huge role to play on investment location decisions. Higher Media Corruption Perceptions of a country lead to lower US foreign direct investment outflows to that CONTACT Mohammad Refakar [email protected] place Charles-Le Moyne, C. P. 200, Longueuil (Québec), Canada J4K 0A8 © 2021 Taylor & Francis Group, LLC École de gestion, Université de Sherbrooke, 150, 2 M. REFAKAR AND J-P. GUEYIE country, even after taking into account the Corruption Perceptions Index (CPI), which is a common corruption measuring index widely used in the literature. Moreover, we find that the countries for which the Media Corruption Perceptions are high, the Media Corruption Perceptions index is a stronger determinant than CPI. Our work contributes to the literature in two respects. First, we provide evidence on US media perceptions as it relates to beliefs about corruption of a country in the US, an aspect that has never been investigated before. The traditional corruption indices measure the perceptions of corruption within the host country. However, how the US investors perception of corruption of the host country is not necessarily the same as the perceptions of corruption in the host country (measured by corruption indices). Media coverage of corruption of a country can change the perceptions of US investors. This is the first study that empirically proves that a relation exists between media coverage of the corruption news of a country in WSJ and the US FDI toward that country. Secondly, thanks to our data, we are able to create a yearly media corruption perceptions index for each country in our dataset from 2000 to 2015. Our results show that media corruption perceptions index (constructed using The Wall Street Journal) is a strong determinant of US outward FDI. The remainder of the paper is organized as follows. In Section 2, we review the literature and outline our analytical framework in more detail. In Section 3, we construct our data and present our methodology. Section 4 reports and discusses the empirical results. Section 5 concludes the paper with a discussion of the most important implications. Literature review In modern economies and societies, the availability of information is central to better decision-making by consumers and investors. Nearly all of that information is provided by the media including newspapers, television, and radio, which collect information and make it available to the public. Media are responsible for shaping our thoughts and our opinions about almost everything, from new fashion trends, voting behaviors (Barone et al., 2015; DellaVigna et al., 2014; DellaVigna & Kaplan, 2007; Enikolopov et al., 2011), violent behavior (Dahl & DellaVigna, 2009), family decisions and fertility choices (Bassi & Rasul, 2017; Chong & Ferrara, 2009; Chong et al., 2012), attitudes toward gambling (De Paola & Scoppa, 2014), foreign policy (Soroka, 2003), to our understanding of other countries (Saleem, 2007). Moreover, the media make an issue important to the people and increase the sensitivity of people toward that issue (Besley & Burgess, 2002; Sen, 1984). For example, media impact government transparency and accountability (Stiglitz 2002), the principal (citizens)-agent (government) problem (Besley and Burgess, 2001; Besley & Burgess, 2002), public policy (Spitzer 1993), and corporate governance (Dyck and Zingales, 2002). As media changes the behavior of people and their sensitivity toward different issues, people get their information about the world outside their community through the mass media (as cited in Cho & Lacy, 2000, p. 830). The power of the media is so strong that they can distort and manipulate information to preclude investors from making informed decisions, or they can provide relevant information for an informed investment (Djankov et al., 2003). The media play a crucial role in the formulation of images of the people of other countries. An “image” is everything a person has learned relevant to a situation and to the acts that occur within it . . . and image is a tendency composed of thoughts, feelings, and inclinations. Images change constantly with experience (Nimmo, 1978, p. 226). Galtung and Ruge (1965) call the media as the “first rate competitors for the number one position as international image former” (see also Tanstall, 1970, p. 260). Cohen further describes that “most of us gather our impressions of our countries and societies from the media” (Mughees, 1997, p. 33). When reading, watching or listening to the media, we are bombarded by information. Even if we are not actively paying attention, this information is processed (both consciously and unconsciously) and over time, these images, sounds and ideas build patterns in our subconscious and profoundly shape the way we think about health, success, relationships and other countries (Potter, 2004). For the full copy of this paper, please contact the corresponding author at: [email protected] or [email protected] JOURNAL OF MEDIA ECONOMICS 15 Discussion and conclusion The media are a powerful tool to shape and form our ideas about almost anything. They can change the way we think about a foreign country, its people and its government. The effects of media as distributors of information have been extensively studied in the finance literature. Media affect stock prices, stock market reactions, trading volume and volatility, firm performance, cost of capital and entrepreneurs’ investment decisions. Media can also shape people’s image of a foreign country. Investors who want to invest abroad are bombarded by the news stories about a country’s corruption. The abundance of these stories could affect their decision to invest in that country. This study is the first study that analyzes the effect of WSJ news stories that cover corruption in a country on US foreign direct investment outflows to that country. We study the effect of having many news stories covering corruption in a specific country on the volume of US foreign direct investment toward that country. We construct a media corruption perceptions (MCP) variable, which is the ratio of the number of stories in WSJ covering corruption in a country in a given year divided by the number of stories WSJ covering news about trades and business in that country. We use a panel of 47 countries over a 16-year period to test our hypotheses. Using a fixed effects panel regression based on the gravity model of trades, we find that MCP is a strong determinant of US foreign direct investment. Even after introducing abundantly used corruption indices in the regressions, the MCP variable stays strongly significant. An increase of 1% in MCP reduces the US FDI outwards by 1 million dollars. This confirms our hypotheses that the media have a significant impact on US FDI outflows. The results of this paper suggest that what is covered in the Wall Street Journal has a great impact on the investment location decision. Investors are reluctant to invest in countries that are perceived as corrupt by the Wall Street Journal even if the corruption indices show otherwise. The investors are sensitive to the reputation of the target country in the media. Our results also confirm previous studies on effects of host country corruption on FDI. Brada et al. (2012), (2019), Mathur and Singh (2013), and Mudambi et al. (2013) and others study the effects of host country corruption on inward FDI flows and find that corrupt host countries are less likely to receive FDI inflows because corruption does play a big role in investors’ location decision. Given the magnitude of these effects, it is clear that reduced corruption coverage of a country can be an important factor for host countries to receive FDI from the US. Disclosure statement No potential conflict of interest was reported by the authors. References Bardhan, P. (1997). Corruption and development: A review of the issues. Journal of Economic Literature, 35(3), 1320–1346. https://doi.org/10.4324/9781315126647-30 Barone, G., D’Acunto, F., & Narciso, G. (2015). Telecracy: Testing for channels of persuasion. American Economic Journal: Economic Policy, 7(2), 30–60. https://doi.org/10.1257/pol.20130318 Barro, R. J., & Lee, J. W. (1994). Sources of economic growth. In Carnegie-Rochester conference series on public policy, 40,1–46. North-Holland. Bassi, V., & Rasul, I. (2017). Persuasion: A case study of papal influences on fertility-related beliefs and behavior. American Economic Journal: Applied Economics, 9(4), 250–302. https://doi.org/10.1257/app.20150540 Bekaert, G., Harvey, C. R., Lundblad, C. T., & Siegel, S. (2014). Political risk spreads. Journal of International Business Studies, 45(4), 471–493. https://doi.org/10.1057/jibs.2014.4 Bénassy-Quéré, A., Coupet, M., & Mayer, T. (2007). Institutional determinants of foreign direct investment. World Economy, 30(5), 764–782. https://doi.org/10.1111/j.1467-9701.2007.01022.x Besley, T., & Burgess, R. (2001). Political agency, government responsiveness and the role of the media. European Economic Review, 45(4-6), 629–640. Besley, T., & Burgess, R. (2002). The political economy of government responsiveness: Theory and evidence from India. Quarterly Journal of Economics, 117(4), 1415–1451. https://doi.org/10.1162/003355302320935061 16 M. REFAKAR AND J-P. GUEYIE Blonigen, B. A., & Piger, J. (2014). Determinants of foreign direct investment. Canadian Journal of Economics/Revue Canadienne D’économique, 47(3), 775–812. https://doi.org/10.1111/caje.12091 Boycko, M., Shleifer, A., & Vishny, R. W. (1995). Privatizing Russia. MIT Press. Brada, J. C., Drabek, Z., Mendez, J. A., & Perez, M. F. (2019). National levels of corruption and foreign direct investment. Journal of Comparative Economics, 47(1), 31–49. https://doi.org/10.1016/j.jce.2018.10.005 Brada, J. C., Drabek, Z., & Perez, M. F. (2012). The effect of home-country and host-country corruption on foreign direct investment. Review of Development Economics, 16(4), 640–663. https://doi.org/10.1111/rode.12009 Cho, H., & Lacy, S. (2000). International conflict coverage in Japanese local daily newspapers. Journalism & Mass Communication Quarterly, 77(4), 830–845. https://doi.org/10.1177/107769900007700407 Chong, A., & Ferrara, E. L. (2009). Television and divorce: Evidence from Brazilian novelas. Journal of the European Economic Association, 7(2–3), 458–468. https://doi.org/10.1162/JEEA.2009.7.2–3.458 Chong, A., La Ferrara, E., & Duryea, S. (2012). Soap operas and fertility: Evidence from Brazil. American Economic Journal: Applied Economics, 4(4), 1–31. https://doi.org/10.1257/app.4.4.1 Click, R. W. (2005). Financial and political risks in US direct foreign investment. Journal of International Business Studies, 36(5), 559–575. https://doi.org/10.1057/palgrave.jibs.8400157 Cox, R. A. K., & Weirich, T. R. (2002). The stock market reaction to fraudulent financial reporting. Managerial Auditing Journal, 17(7), 374–382. https://doi.org/10.1108/02686900210437471 Cuervo-Cazurra, A. (2008). The effectiveness of laws against bribery abroad. Journal of International Business Studies, 39 (4), 634–651. https://doi.org/10.1057/palgrave.jibs.8400372 Dahl, G., & DellaVigna, S. (2009). Does movie violence increase violent crime? The Quarterly Journal of Economics, 124 (2), 677–734. https://doi.org/10.1162/qjec.2009.124.2.677 De Paola, M., & Scoppa, V. (2014). Media exposure and individual choices: Evidence from lottery players. Economic Modelling, 38, 385–391. https://doi.org/10.1016/j.econmod.2014.01.006 Delgado, M. S., McCloud, N., & Kumbhakar, S. C. (2014). A generalized empirical model of corruption, foreign direct investment, and growth. Journal of Macroeconomics, 42, 298–316. https://doi.org/10.1016/j.jmacro.2014.09.007 DellaVigna, S., Enikolopov, R., Mironova, V., Petrova, M., & Zhuravskaya, E. (2014). Cross-border media and nationalism: Evidence from Serbian radio in Croatia. American Economic Journal: Applied Economics, 6(3), 103–132. https://doi.org/10.3386/w16989 DellaVigna, S., & Gentzkow, M. (2010). Persuasion: Empirical evidence. Annual Review of Economics, 2(1), 643–669. https://doi.org/10.1146/annurev.economics.102308.124309 DellaVigna, S., & Kaplan, E. (2007). The fox news effect: Media bias and voting. The Quarterly Journal of Economics, 122 (3), 1187–1234. https://doi.org/10.1162/qjec.122.3.1187 Djankov, S., McLiesh, C., Nenova, T., & Shleifer, A. (2003). Who owns the media? Journal of Law and Economics, 46(6), 341–381. https://doi.org/10.1086/377116 Dougal, C., Engelberg, J., Garcia, D., & Parsons, C. A. (2012). Journalists and the stock market. The Review of Financial Studies, 25(3), 639–679. https://doi.org/10.1093/rfs/hhr133 Drabek, Z., & Payne, W. (2002). The impact of transparency on foreign direct investment. Journal of Economic Integration, 17(4), 777–810. https://doi.org/10.11130/jei.2002.17.4.777 Dyck, Alexander and Luigi Zingales (2002). The Corporate Governance Role of the Media, in: Alisa Clapp-Itnyre, Roumeen Islam and Caralee McLiesh (eds.), The Right to Tell: The Role of Mass Media in Economic Development. 107–140. Washington D. C.: The World Bank. Engelberg, J. E., & Parsons, C. A. (2011). The causal impact of media in financial markets. The Journal of Finance, 66(1), 67–97. https://doi.org/10.1111/j.1540-6261.2010.01626.x Enikolopov, R., Petrova, M., & Zhuravskaya, E. (2011). Media and political persuasion: Evidence from Russia. American Economic Review, 101(7), 3253–3285. https://doi.org/10.1257/aer.101.7.3253 Fang, L., & Peress, J. (2009). Media coverage and the cross-section of stock returns. The Journal of Finance, 64(5), 2023–2052. https://doi.org/10.1111/j.1540-6261.2009.01493.x Galtung, J., & Ruge, M. H. (1965). The structure of foreign news: The presentation of the Congo, Cuba and Cyprus crises in four Norwegian newspapers. Journal of peace research, 2(1), 64–90. Godinez, J. R., & Liu, L. (2015). Corruption distance and FDI flows into Latin America. International Business Review, 24 (1), 33–42. https://doi.org/10.1016/j.ibusrev.2014.05.006 Habib, M., & Zurawicki, L. (2002). Corruption and foreign direct investment. Journal of International Business Studies, 33(2), 291–307. https://doi.org/10.1057/palgrave.jibs.8491017 Hamilton, C., & Winters, L. A. (1992). Opening up international trade with Eastern Europe. Economic Policy, 7(14), 77–116. https://doi.org/10.2307/1344513 Heckman, J. J. (1979). Sample selection bias as a specification error. Econometrica: Journal of the Econometric Society, 47 (1), 153–161. https://doi.org/10.2307/1912352 Hines, J. (1995). Forbidden payment: Foreign bribery and American business. NBER Working Paper 5266. Karpoff, J., Lott, J., & Wehrly, E. (2005). The reputational penalties for environmental violations: Empirical evidence. Journal of Law and Economics, 48(2), 653–675. https://doi.org/10.1086/430806 Kunczik, M. (1997). Images of nations and international public relations. Lawrence Erlbaum. JOURNAL OF MEDIA ECONOMICS 17 Mathur, A., & Singh, K. (2013). Foreign direct investment, corruption and democracy. Applied Economics, 45(8), 991–1002. https://doi.org/10.1080/00036846.2011.613786 Mauro, P. (1995). Corruption and growth. Quarterly Journal of Economics, 110(3), 681–712. https://doi.org/10.2307/ 2946696 Mudambi, R., Navarra, P., & Delios, A. (2013). Government regulation, corruption, and FDI. Asia Pacific Journal of Management, 30(2), 487–511. https://doi.org/10.1007/s10490-012-9311-y Mughees-uddin, (1997) The case of Pakistan (1980–1990) editorial treatment of U.S. foreign policy in The New York Times. Quarterly Journal,4(2), p.33. Murphy, D., Shrieves, R., & Tibbs, S. (2009). Understanding the penalties associated with corporate misconduct: An empirical examination of earnings and risk. Journal of Financial and Quantitative Analysis, 44(1), 55–83. https://doi. org/10.1017/S0022109009090036 Murphy, K. M., Shleifer, A., & Vishny, R. W. (1991). The allocation of talent: Implication for growth. Quarterly Journal of Economics, 106(2), 503–530. https://doi.org/10.2307/2937945 Nimmo, D. D. (1978). Political communication and public opinion in America. Goodyear Publishing Company. Oseghale, B. D., & Nwachukwu, O. C. (2010). Effect of the quality of host country institutions on reinvestment by United States multinationals: A panel data analysis. International Journal of Management, 27(3), 497–510. Peress, J. (2008). Media coverage and investors’ attention to earnings announcements. SSRN 2723916. http://dx.doi.org/ 10.2139/ssrn.2723916 Peress, J. (2014). The media and the diffusion of information in financial markets: Evidence from newspaper strikes. The Journal of Finance, 69(5), 2007–2043. https://doi.org/10.1111/jofi.12179 Pinto, P. M., & Zhu, B. (2016). Fortune or evil? The effect of inward foreign direct investment on corruption. International Studies Quarterly, 60(4), 693–705. https://doi.org/10.1093/isq/sqw025 Potter, W. J. (2004). Theory of media literacy: A cognitive approach. Publisher SAGE Publications. Rizzica, L., & Tonello, M. (2015). Exposure to media and corruption perceptions. Bank of Italy Temi di Discussione (Working Paper) No, 1043. Rossi, S., & Volpin, P. (2004). Cross-country determinants of mergers and acquisitions. Journal of Financial Economics, 74(2), 277–304. https://doi.org/10.1016/j.jfineco.2003.10.001 Saleem, N. (2007). US media framing of foreign countries image: An analytical perspective. Canadian Journal of Media Studies, 2(1), 130–162. Sanyal, R., & Samanta, S. (2008). Effect of perception of corruption on outward US foreign direct investment. Global Business and Economics Review, 10(1), 123–140. https://doi.org/10.1504/GBER.2008.016831 Sen, A. (1984). Food battles: conflicts in the access to food. Food and Nutrition, 10(1), 81–89 Shleifer, A., & Vishny, R. (1993). Corruption. The Quarterly Journal of Economics, 108(3), 599–617. https://doi.org/10. 2307/2118402 Soroka, S. N. (2003). Media, public opinion, and foreign policy. Harvard International Journal of Press/Politics, 8(1), 27–48. https://doi.org/10.1177/1081180X02238783 Spitzer, Robert J. (ed.) (1993). Media and Public Policy. New York: Praeger Publishers Stiglitz, Joseph (2002). Transparency in Government, in: Alisa Clapp-Itnyre, Roumeen Islam and Caralee McLiesh (eds.), The Right to Tell: The Role of Mass Media in Economic Development. 27–44. Washington D. C.: The World Bank. Tanstall, J. (Ed.). (1970). Media sociology a reader. Urbana: University of Illinois Press. Tetlock, P. C. (2007). Giving content to investor sentiment: The role of media in the stock market. The Journal of Finance, 62(3), 1139–1168. https://doi.org/10.1111/j.1540-6261.2007.01232.x Tetlock, P. C. (2015). The role of media in finance. Handbook of Media Economics, 1(1), 701–721. https://doi.org/10. 1016/b978-0-444-63685-0.00018-8 Tetlock, P. C., Saar-Tsechansky, M., & Macskassy, S. (2008). More than words: Quantifying language to measure firms’ fundamentals. Journal of Finance, 63(3), 1437–1467. https://doi.org/10.1111/j.1540-6261.2008.01362.x Wei, S.-J. (2000). How taxing is corruption on international investors. Review of Economics and Statistics, 82(1), 1–11. https://doi.org/10.1162/003465300558533