Coping with corruption in foreign markets

Academy of Management Executive

Volumn 17, Issue 3, 2003, Pages 114-129

  Doh, Jonathan P ^a   Rodriguez, Peter ^d   Uhlenbruck, Klaus ^b   Collins, Jamie ^e   Eden, Lorraine ^c   Shekshnia, Stanislav ^e  

^a VILLANOVA UNIVERSITY   (United States)

^b TEXAS A AND M UNIVERSITY   (United States)

^c TEXAS A AND M UNIVERSITY   (United States)

^d UNIVERSITY OF VIRGINIA   (United States)

^e NONE

Author keywords

[No Author keywords available]

Indexed keywords

EID: 4043063376     PISSN: 10795545     EISSN: None     Source Type: Journal    
DOI: 10.5465/ame.2003.10954775     Document Type: Review

References (70)

1. Asian Wall Street Journal. Ruling puts foreign infrastructure investors at risk, 29 March 2002: A3.
2. Webster, P. 2002. Ripped off in Russia. Maclean's. www. mcleans.ca.
3. Economist. Corruption in Lesotho: Small place, big wave. 21 September 2002: 73.
4. The World Bank, 1998. Global development finance.
5. See Henisz, W. J., & Williamson, O. E. 1999. Comparative economic organization - within and between countries. Business and Politics, 1: 261-277; Hill, C. W. L. Hwang, P., & Kim, W. C. 1990. An electric theory of the choice of international entry mode. Strategic Management Journal, 11: 117-128; Kobrin, S. 1979. Political risk: A review and reconsideration, Journal of International Business Studies, 10: 67-80; and Murtha, T. 1991. Surviving industrial targeting: State credibility and public policy competencies in multinational subcontracting. Journal of Law, Economics and Organization, 7: 117-143.
6. See Henisz, W. J., & Williamson, O. E. 1999. Comparative economic organization - within and between countries. Business and Politics, 1: 261-277; Hill, C. W. L. Hwang, P., & Kim, W. C. 1990. An electric theory of the choice of international entry mode. Strategic Management Journal, 11: 117-128; Kobrin, S. 1979. Political risk: A review and reconsideration, Journal of International Business Studies, 10: 67-80; and Murtha, T. 1991. Surviving industrial targeting: State credibility and public policy competencies in multinational subcontracting. Journal of Law, Economics and Organization, 7: 117-143.
7. See Henisz, W. J., & Williamson, O. E. 1999. Comparative economic organization - within and between countries. Business and Politics, 1: 261-277; Hill, C. W. L. Hwang, P., & Kim, W. C. 1990. An electric theory of the choice of international entry mode. Strategic Management Journal, 11: 117-128; Kobrin, S. 1979. Political risk: A review and reconsideration, Journal of International Business Studies, 10: 67-80; and Murtha, T. 1991. Surviving industrial targeting: State credibility and public policy competencies in multinational subcontracting. Journal of Law, Economics and Organization, 7: 117-143.
8. See Henisz, W. J., & Williamson, O. E. 1999. Comparative economic organization - within and between countries. Business and Politics, 1: 261-277; Hill, C. W. L. Hwang, P., & Kim, W. C. 1990. An electric theory of the choice of international entry mode. Strategic Management Journal, 11: 117-128; Kobrin, S. 1979. Political risk: A review and reconsideration, Journal of International Business Studies, 10: 67-80; and Murtha, T. 1991. Surviving industrial targeting: State credibility and public policy competencies in multinational subcontracting. Journal of Law, Economics and Organization, 7: 117-143.
9. A limited but growing body of research has explored the impact of corruption on FDI, generally finding that corruption significantly reduces FDI into an economy. For a recent review, see Habib, M., & Zurawicki, L. 2002. Corruption and foreign direct investment. Journal of international Business Studies, 33: 291-307. These authors find that corruption reduces aggregate FDI even when controlling for political risk, cultural distance, and level-of-corruption differences between the home and host countries.
10. See D'Andrade, K. 1985. Bribery. Journal of Business Ethics, 4 (4): 239-248; Johnson, H. L. 1985. Bribery in international markets: Diagnosis, clarification and remedy. Journal of Business Ethics, 4 (6): 447-455; and Lane, H. W., & Simpson, D. G. 1984. Bribery in international business: Whose problem is it? Journal of Business Ethics, 3 (1): 35-42.
11. See D'Andrade, K. 1985. Bribery. Journal of Business Ethics, 4 (4): 239-248; Johnson, H. L. 1985. Bribery in international markets: Diagnosis, clarification and remedy. Journal of Business Ethics, 4 (6): 447-455; and Lane, H. W., & Simpson, D. G. 1984. Bribery in international business: Whose problem is it? Journal of Business Ethics, 3 (1): 35-42.
12. See D'Andrade, K. 1985. Bribery. Journal of Business Ethics, 4 (4): 239-248; Johnson, H. L. 1985. Bribery in international markets: Diagnosis, clarification and remedy. Journal of Business Ethics, 4 (6): 447-455; and Lane, H. W., & Simpson, D. G. 1984. Bribery in international business: Whose problem is it? Journal of Business Ethics, 3 (1): 35-42.
13. See Ahlstrom, D., & Bruton, G. D. 2001. Learning from successful local private firms in China: Establishing legitimacy. The Academy of Management Executive, 15(4): 72-83; and Boddewyn, J. J., & Brewer, T. L. 1994. International business political behavior: New theoretical directions. Academy of Management Review, 19(1): 119-144.
14. See Ahlstrom, D., & Bruton, G. D. 2001. Learning from successful local private firms in China: Establishing legitimacy. The Academy of Management Executive, 15(4): 72-83; and Boddewyn, J. J., & Brewer, T. L. 1994. International business political behavior: New theoretical directions. Academy of Management Review, 19(1): 119-144.
15. For a review of the particular challenges associated with securing foreign investment in infrastructure, see Vernon, R. 1971. Sovereignty at bay: The multinational spread of U.S. enterprises. New York: Basic Books; Doz, Y., & Prahalad, S. 1980. How MNCs cope with host government intervention. Harvard Business Review, March-April: 149-157; Fagre, N., & Wells, L. T. 1982. Bargaining power of multinationals and host governments. Journal of International Business Studies, 13: 9-23; Kobrin, S. 1987. Testing the bargaining hypothesis in the manufacturing sector in developing countries. International Organization, 41: 609-638; and Wells, L. T., & Gleason, E. S. 1995. Is foreign infrastructure investment still risky? Harvard Business Review, September-October: 44-53.
16. For a review of the particular challenges associated with securing foreign investment in infrastructure, see Vernon, R. 1971. Sovereignty at bay: The multinational spread of U.S. enterprises. New York: Basic Books; Doz, Y., & Prahalad, S. 1980. How MNCs cope with host government intervention. Harvard Business Review, March-April: 149-157; Fagre, N., & Wells, L. T. 1982. Bargaining power of multinationals and host governments. Journal of International Business Studies, 13: 9-23; Kobrin, S. 1987. Testing the bargaining hypothesis in the manufacturing sector in developing countries. International Organization, 41: 609-638; and Wells, L. T., & Gleason, E. S. 1995. Is foreign infrastructure investment still risky? Harvard Business Review, September-October: 44-53.
17. For a review of the particular challenges associated with securing foreign investment in infrastructure, see Vernon, R. 1971. Sovereignty at bay: The multinational spread of U.S. enterprises. New York: Basic Books; Doz, Y., & Prahalad, S. 1980. How MNCs cope with host government intervention. Harvard Business Review, March-April: 149-157; Fagre, N., & Wells, L. T. 1982. Bargaining power of multinationals and host governments. Journal of International Business Studies, 13: 9-23; Kobrin, S. 1987. Testing the bargaining hypothesis in the manufacturing sector in developing countries. International Organization, 41: 609-638; and Wells, L. T., & Gleason, E. S. 1995. Is foreign infrastructure investment still risky? Harvard Business Review, September-October: 44-53.
18. For a review of the particular challenges associated with securing foreign investment in infrastructure, see Vernon, R. 1971. Sovereignty at bay: The multinational spread of U.S. enterprises. New York: Basic Books; Doz, Y., & Prahalad, S. 1980. How MNCs cope with host government intervention. Harvard Business Review, March-April: 149-157; Fagre, N., & Wells, L. T. 1982. Bargaining power of multinationals and host governments. Journal of International Business Studies, 13: 9-23; Kobrin, S. 1987. Testing the bargaining hypothesis in the manufacturing sector in developing countries. International Organization, 41: 609-638; and Wells, L. T., & Gleason, E. S. 1995. Is foreign infrastructure investment still risky? Harvard Business Review, September-October: 44-53.
19. For a review of the particular challenges associated with securing foreign investment in infrastructure, see Vernon, R. 1971. Sovereignty at bay: The multinational spread of U.S. enterprises. New York: Basic Books; Doz, Y., & Prahalad, S. 1980. How MNCs cope with host government intervention. Harvard Business Review, March-April: 149-157; Fagre, N., & Wells, L. T. 1982. Bargaining power of multinationals and host governments. Journal of International Business Studies, 13: 9-23; Kobrin, S. 1987. Testing the bargaining hypothesis in the manufacturing sector in developing countries. International Organization, 41: 609-638; and Wells, L. T., & Gleason, E. S. 1995. Is foreign infrastructure investment still risky? Harvard Business Review, September-October: 44-53.
20. The Economist. Not quite so squeaky clean. 18 October 2001. www.economist.com.
21. The Economist. Small place, big wave. 19 September 2002. www.economist.com.
22. The Economist. When something is rotten. 25 July 2002. www.economist.com.
23. It should be noted that "grease payments" or "facilitating payments" are permitted under the Foreign Corrupt Practices Act if they are paid to government officials in order to induce them to undertake a routine non-discretionary task which is otherwise within their job description.
24. Cassidy, W. B. 2002. Fraud, bribery, etc. Traffic World. 266(29): 8-10.
25. Scott, R. 2002. Eliminating bribery as a transnational marketing strategy. International Journal of Commerce & Management, 12(1): 1-17.
26. The Economist, Dotcom coup. 15 March 2001. www.economist. com.
27. The Economist. Special report: The short arm of the law - Bribery and business. 2 March 2002. www.economist.com.
28. Ahlstrom & Bruton, op. cit.
29. Webster, op. cit.
30. See Mauro, P. 1995. Corruption and growth. The Quarterly Journal of Economics, 110 (3): 681-712; Mauro, P. 1998. Corruption and the composition of government expenditure. Journal of Public Economics, 69: 263-279; World Bank. 1997. World development report 1997: The state in a changing world. Oxford, UK, and New York: Oxford University Press; and Herrera, A., & Rodriguez, P. 2001. Bribery and the nature of corruption. Papers and Proceedings, LACEA Conference, Montevideo, Uruguay.
31. See Mauro, P. 1995. Corruption and growth. The Quarterly Journal of Economics, 110 (3): 681-712; Mauro, P. 1998. Corruption and the composition of government expenditure. Journal of Public Economics, 69: 263-279; World Bank. 1997. World development report 1997: The state in a changing world. Oxford, UK, and New York: Oxford University Press; and Herrera, A., & Rodriguez, P. 2001. Bribery and the nature of corruption. Papers and Proceedings, LACEA Conference, Montevideo, Uruguay.
32. See Mauro, P. 1995. Corruption and growth. The Quarterly Journal of Economics, 110 (3): 681-712; Mauro, P. 1998. Corruption and the composition of government expenditure. Journal of Public Economics, 69: 263-279; World Bank. 1997. World development report 1997: The state in a changing world. Oxford, UK, and New York: Oxford University Press; and Herrera, A., & Rodriguez, P. 2001. Bribery and the nature of corruption. Papers and Proceedings, LACEA Conference, Montevideo, Uruguay.
33. See Mauro, P. 1995. Corruption and growth. The Quarterly Journal of Economics, 110 (3): 681-712; Mauro, P. 1998. Corruption and the composition of government expenditure. Journal of Public Economics, 69: 263-279; World Bank. 1997. World development report 1997: The state in a changing world. Oxford, UK, and New York: Oxford University Press; and Herrera, A., & Rodriguez, P. 2001. Bribery and the nature of corruption. Papers and Proceedings, LACEA Conference, Montevideo, Uruguay.
34. Mauro, 1995, op. cit.
35. Economist. The revenue problem. 15 February 2003: 36. Other Latin American countries feature similarly low tax yields: Guatemala (10%), Mexico (18%) versus 30% in the US.
36. Brunetti, A., & Weder, B. 1998. Investment and institutional uncertainty: A comparative study of different uncertainty measures. Weltwirtschaftliches Archiv, 134: 513-533.
37. Gray, C., & Kaufmann, D. 1998. Corruption and development. Finance and Development, 35 (1): 7-10.
38. Mauro, P. 1997. The effects of corruption on growth, investment, and government expenditure: A cross-country analysis. In K. A. Elliot (Ed.), Corruption and the global economy: 83-107. Washington, DC: Institute for International Economics; Keefer, P. 1996. Protection against a capricious state: French investment and Spanish railroads, 1845-1875. The Journal of Economic History, 56(1): 170-192; and Brunetti & Weder, op. cit.
39. Mauro, P. 1997. The effects of corruption on growth, investment, and government expenditure: A cross-country analysis. In K. A. Elliot (Ed.), Corruption and the global economy: 83-107. Washington, DC: Institute for International Economics; Keefer, P. 1996. Protection against a capricious state: French investment and Spanish railroads, 1845-1875. The Journal of Economic History, 56(1): 170-192; and Brunetti & Weder, op. cit.
40. Mauro, P. 1997. The effects of corruption on growth, investment, and government expenditure: A cross-country analysis. In K. A. Elliot (Ed.), Corruption and the global economy: 83-107. Washington, DC: Institute for International Economics; Keefer, P. 1996. Protection against a capricious state: French investment and Spanish railroads, 1845-1875. The Journal of Economic History, 56(1): 170-192; and Brunetti & Weder, op. cit.
41. Transparency International. 2003. 2003 global corruption report. London: Profile Books.
42. Johnston, M. 1999. Corruption et démocratie: Menaces pour le développement, possibilités de réforme. Revue Tiers Monde, 161: 117-142.
43. See Rodriguez, P., Uhlenbruck, K., & Eden, L. (in press) Government corruption and the entry strategies of multinationals. Academy of Management Review; Shleifer, A., & Vishny, R. 1993. Corruption. Quarterly Journal of Economics, 108: 599-617.
44. See Rodriguez, P., Uhlenbruck, K., & Eden, L. (in press) Government corruption and the entry strategies of multinationals. Academy of Management Review; Shleifer, A., & Vishny, R. 1993. Corruption. Quarterly Journal of Economics, 108: 599-617.
45. I b i d.
46. Borsuk, R. In Indonesia, a twist on spreading the wealth: Decentralization of power multiplies opportunities for bribery, corruption. Wall Street Journal, 29 January 2003: A16.
47. See World Development Report, op. cit.; Wei, S.-J. 1997. Why is corruption so much more taxing than tax? Arbitrariness kills. NBER working paper No. 6255; and Campos, J. E., Lien, D., & Pradhan, S. 1999. The impact of corruption on investment: Predictability matters. World Development, 27: 1059-1067.
48. See World Development Report, op. cit.; Wei, S.-J. 1997. Why is corruption so much more taxing than tax? Arbitrariness kills. NBER working paper No. 6255; and Campos, J. E., Lien, D., & Pradhan, S. 1999. The impact of corruption on investment: Predictability matters. World Development, 27: 1059-1067.
49. See World Development Report, op. cit.; Wei, S.-J. 1997. Why is corruption so much more taxing than tax? Arbitrariness kills. NBER working paper No. 6255; and Campos, J. E., Lien, D., & Pradhan, S. 1999. The impact of corruption on investment: Predictability matters. World Development, 27: 1059-1067.
50. Campos, et al., op. cit.
51. Rivoli, P., & Salorio, E. 1996. Foreign direct investment and investment under uncertainty. Journal of International Business Studies, 27: 335-357.
52. Smarzynska, B., & Wei, S.-J. 2000. Corruption and the composition of foreign direct investment: Firm-level evidence. NBER Working paper No. 7969. A recent Department of Justice Advisory Opinion, however, has stated that U.S. firms would be held responsible for the business practices of the agents hired by JV partners, even if the agents were hired prior to the JV. Now, the legal burden is as great as operating alone, but the controls (through a JV partner) are virtually non-existent. In addition, while it has been suggested that some companies try to push the payment of bribes down their marketing chain to local partners, FCPA and new laws implementing the OECD Corruption Agreement state expressly that payments may not be made directly or indirectly through third parties.
53. Telecommunications is a particularly appropriate industry for this study because a significant portion of FDI in the 1990s came from telecommunication MNEs, especially investment into emerging countries with high market potential but with significant and varying corruption levels. Further, infrastructure projects typically involve numerous government agencies, and thus corruption as defined herein is an important environmental variable. While it is true that the telecom industry has idiosyncratic characteristics that may not be applicable to some other industries, it is has been identified as the "flagship" industry for the range of international infrastructure investment - electric power development, transportation, water and sewerage - and so many other industries are reliant upon telecom services. These figures represent the findings of logistic regression analysis that includes a number of control variables at the country, industry, firm, and project levels.
54. See Zaheer, S. 1995. Overcoming the liability of foreignness. Academy of Management Journal, 38(2): 341-363; Beamish, P. W. & Banks, J. C. 1987. Equity joint ventures and the theory of the multinational enterprise. Journal of International Business Studies, 18(2): 1-16; Hill, et al. op. cit; and Yiu, D., & Makino, S. 2002. The choice between joint venture and wholly owned subsidiary: An institutional perspective. Organization Science, 13(6): 667-683.
55. See Zaheer, S. 1995. Overcoming the liability of foreignness. Academy of Management Journal, 38(2): 341-363; Beamish, P. W. & Banks, J. C. 1987. Equity joint ventures and the theory of the multinational enterprise. Journal of International Business Studies, 18(2): 1-16; Hill, et al. op. cit; and Yiu, D., & Makino, S. 2002. The choice between joint venture and wholly owned subsidiary: An institutional perspective. Organization Science, 13(6): 667-683.
56. See Zaheer, S. 1995. Overcoming the liability of foreignness. Academy of Management Journal, 38(2): 341-363; Beamish, P. W. & Banks, J. C. 1987. Equity joint ventures and the theory of the multinational enterprise. Journal of International Business Studies, 18(2): 1-16; Hill, et al. op. cit; and Yiu, D., & Makino, S. 2002. The choice between joint venture and wholly owned subsidiary: An institutional perspective. Organization Science, 13(6): 667-683.
57. See Zaheer, S. 1995. Overcoming the liability of foreignness. Academy of Management Journal, 38(2): 341-363; Beamish, P. W. & Banks, J. C. 1987. Equity joint ventures and the theory of the multinational enterprise. Journal of International Business Studies, 18(2): 1-16; Hill, et al. op. cit; and Yiu, D., & Makino, S. 2002. The choice between joint venture and wholly owned subsidiary: An institutional perspective. Organization Science, 13(6): 667-683.
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