Twelfth Global Studies Conference

Abstract

This paper examines the variation of illicit financial outflows through trade misinvoicing in developing countries. Building on the existing literature of corruption, this research develops the argument that a country’s amount of illicit outflows depends on the corruption level of the domestic market of its trading partners. In contrast to existing research on illicit financial flows, this argument accounts for pull factors from trading partners as exporting companies operate within a global network of trade and finance. This builds on the assumption that trade companies have the option to misuse corruptive environments in order to violate the international trade standards without having to fear legal investigations. To test this hypothesis, I employ panel data from the Global Financial Integrity, the World Bank, Transparency International, Chinn and Ito (2018), the PRS Group and the KOF Konjunkturforschungsstelle covering 84 countries and the period 2005-2014. The regression results do not support the hypothesis that trading partners’ corruption environment increase illicit financial outflows. Neither do the results suggest a positive effect of high economic and political instability or high domestic corruption. Instead, the regression results show that the degree of globalization and the size of an economy influence trade misinvoicing outflows positively. In conclusion, this project recommends countries to spur their economic development as high GDP per capita levels, other than the tested political factors, proof to be a functioning repellant for high trade misinvoicing outflows.