National levels of corruption and foreign direct investment

•FDI from countries considered as corrupt or institutionally weak is growing in importance. Often these investments are directed toward countries that are similarly corrupt.•We construct a model of bilateral FDI stocks that explains why MNCs tend to invest greater amounts and more frequently in countries with similar levels of corruption and less in countries with different corruption levels.•Our model also predicts that corrupt countries will receive less foreign direct investment.•We test the model using bilateral FDI stocks between a large number of home and host countries. Differences in corruption levels do have statistically and economically significant effects on bilateral FDI, confirming our model.•Robustness tests verify that the results are robust to the inclusion of other commonly used covariates such as bilateral investment treaties, anti-bribery legislation, etc.