Corporation as crucial ally against corruption

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1、CORPORATION AS A CRUCIAL ALLY AGAINST CORRUPTION Reyes Caldern, Jos Luis lvarez Arce and Silvia Mayoral School of Economics and Business AdministrationUniversity of Navarra. Campus Universitario s/n. 31080 Pamplona (Spain)rcalderonunav.es, jlalvarezunav.es, smayoralunav.esCORPORATION AS A CRUCIAL AL

2、LY AGAINST CORRUPTION AbstractManuscript Type: EmpiricalResearch Question/Issue: This paper aims to contribute to an improved theoretical and empirical understanding of the role that corporation has to play in anticorruption efforts. Research Findings/Insights: Using cross-country data from three da

3、tabases (Bribe Payers Index, Corruption Perceptions Index and Doing Business) we found that pro-bribery Investment Climate conditions in host countries are not related to the payments of bribes by multinational companies when these corporations operate abroad.Theoretical/Academic Implications: After

4、 describing the conceptual and policy framework that surrounds the discussion on the role played by firms in anticorruption, we present the current debate regarding the effectiveness of international bribery control instruments, with the World Bank-GAC (2006-8) report as a basis. Both literature and

5、 policy seem to be divided into two main, although not mutually exclusive, positions: one demands improvements in Investment Climate conditions from a joint public-private consensus led by international agencies; the other one supports the effectiveness of self-regulation by firms, independently of

6、Investment Climate improvements. The study provides empirical support to the idea that a better Investment Climate is not enough for reducing corruption. Practitioner/Policy Implications: This study offers insights to policy makers interested in promoting the involvement of corporations in the fight

7、 against corruption. INTRODUCTIONThis paper aims to contribute to an improved understanding of the role played by corporations in economic corruption, with the current World Bank Governance and Anticorruption report (WB-GAC, 2006-8) as a basis. With this purpose, we first provide a description of th

8、e conceptual and policy framework, and an overview of the current debate surrounding the issue.Economic corruption refers to a public official distributing commodities or allocating resources who views his/her office as a private source of gains (Jain, 2001; Rose-Ackerman, 1999). Bribery, which resu

9、lts from demand the bribe taker and supply the bribe giver, is best understood and combated if both sides are simultaneously dealt with (Berkos, 1999). Even this being the case, for decades, policy and research primarily addressed the demand side, while the supply side, usually associated with multi

10、national corporations (MNCs) depicted as the innocent party, received little attention (MacMurray, 2006; Beets, 2005; Vogl, 1998). We explain why some factors, like the increasing costs and risks of corruption (Aidt, 2003), pressures from stakeholders (Waddock et al, 2002) and poor anticorruption pe

11、rformance (Vernon et al, 2005), are gradually expanding the focus from demand to demand-supply factors (Sung, 2005). In this new scenario the corporation is called to participate as a “crucial ally” (WB-GAC, 2006:ii) and a “key pillar of integrity” (UN, 2004:83). Subsequently, we examine the current

12、 debate, which is raising many related questions regarding the selection and implementation of international bribery control instruments: Can societies rely on individual company policies or on industry self-regulation? Are other means such as laws or statutes needed? Must the public sector lead the

13、 process?At the forefront of this debate we find two variables: the firms vulnerability to the investment climates (IC) characteristics and the leadership of the joint public-private coalition for reform. Both have divided literature and policy in two main, but not mutually exclusive, positions. One

14、 demands a join public-private consensus led by international agencies, and IC improvement as a precondition. The other supports the effectiveness of self-regulation, and its independence of IC improvement 1.We offer some empirical evidence on the issue. Using the “Bribe Payers Index” (BPI), the “Co

15、rruption Perception Index” (CPI) by Transparency International (TI), and the “Doing-Business” (DB) database by the World Bank (WB), we test the correlation between the propensity of MNCs to pay bribes when operating abroad and the pro-bribery IC conditions in host countries. Our results suggest a lo

16、w significance of IC factors in bribe-taking behavior at the country level. Therefore, we conclude that the improvement of IC is not enough to reduce bribery. The structure of this paper is as follows. We first provide the theoretical framework, describing factors that explain the growing interest i

17、n the supply side of corruption. Then we carry out a critical description of WB-GAC, emphasizing the roles assigned to IC and corporation. After that, we discuss the debate and main positions regarding the selection and implementation of anti-bribery instruments. In the last section, we describe the

18、 empirical analysis and show our results. Findings are then discussed, and the final section examines some limitations of our analysis as well as possible venues for future research. THE SUPPLY SIDE OF ANTICORRUPTION EFFORTSMost research and conventions on anticorruption adopt demand-pull perspectiv

19、es (MacMurray, 2006; Sung, 2005; Vogl, 1998). Although observers vouch for the generalization and extension of bribery$1 trillion in 2003 (WBI, 2004), with the corporation ranked as the most corrupt institution in countries like Hong Kong or the Netherlands (Global Corrupt Barometer, 2004), strategi

20、es have largely neglected the role played by bribe givers. With few exceptions the “Foreign Corrupt Practices Act” (FCPA, 1977) and the OECDs “Convention on Combating Bribery of Foreign Public Officials in International Business Transaction” (OECD, 1997), which will be discussed afterwards, all coun

21、tries criminalize and punish corrupt officials, while sanctions for paying bribes remain rare (Rose-Ackerman, 2002).The insistence on addressing the demand side was based on two elements: the supposed efficiency of demand-pull instruments, and all the problems associated with attempting to regulate

22、the supply side.The demand-side perspective is built on one key assumption: there is a systemic failure, symptom of the states fundamental weaknesses, which can be efficiently combated by different means: ethical development in the public sectors infrastructure (Berkos, 1999); better legislative act

23、ions and law enforcement (Dollar and Levin, 2006); stronger and more effective public institutions (Huang and Wei, 2006); accountability and transparency requirements (Everett et al, 2007); and privatization and decentralization (Caselli and Morelli, 2004). Authors add the positive impact of governm

24、ent on wealth promotion (Husted, 1999), the reduction of inequality (You and Khagram, 2005), the control of extractive industries (OHiggins, 2006), and the support of an anti-corruption culture (Sanyal, 2005). This spirit is clearly seen in the Inter-American Convention against Corruption (1996), wh

25、ose preamble proposes “especially action against persons who commit acts of corruption in the performance of public functions”. When focusing on supply-side instruments, however, some difficulties emerge. One of these is the likelihood of a “race to the bottom” effect in cross-country competition fo

26、r doing and attracting business. While some countries impose strict laws on domestic firms competing for offshore business, others are reluctant. The US Department of State claims that, due to this factor, between 1994 and 2001, American business lost 400 major contracts (Sung, 2005). On the other h

27、and, the corporation is constituted as a legal person, for whom only dissuasive non-criminal sanctions are applicable (OCDE, 1997:art. 3). Moreover, the literature shows strong technical problems related with data and aggregation, due to the heterogeneity of the supply (Dollar et al, 2005). These fa

28、ctors explain why only one main instrument the disallowing of the tax deductibility of bribes has obtained consensus.However, a new sensibility seems to be emerging. All the involved agents now agree that corporations have a main role to play in promoting transparency and curbing corruption. The WB-

29、GAC names the corporation a “crucial ally against corruption” and the UN (2004:84) considers it as a “key pillar of integrity”.Poor results of anticorruption efforts explain this new view. After two decades of emphasis on demand-side elements, corruption has not dissipated and improvements have most

30、ly stagnated (Veron et al, 2006). Policymakers and academia have finally become convinced that “governments alone cannot contain corruption” (UN, 2004: 17). “Traditional public sector intervention is not enough in tackling challenges. Wider engagement with the domestic private sector and MNCs is req

31、uired” (WB-GAC, 2006: introduction).Impelled by stakeholder pressures and the perceived costs and risks, the corporation has accepted its new role. Bribery and corruption are nowadays among the great issues on corporate governances agenda (Elkington, 2007). Although corrupt practices can be benefici

32、al for some individual firms, corruption increases costs and risks for the whole. In contrast with free markets and quality institutions, corruption increases transaction and doing-business costs (Pantzalis et al, 2007). With insecure property rights, high risk of expropriation and low reliability o

33、f contract enforcement, the number and size of firms (Beck et al, 2005), foreign investment (Mauro, 1995), profit per firm (Ades and Di Tella, 1997), long-term performance (Baucus and Baucus, 1998), and quality of produced goods (Nwabuzor, 2005) are reduced. Gjessing and Syse (2007) signal that inve

34、stors recognize the additional risk, and attempt to ensure the corporation has sufficient internal controls while top management supports and implements relevant anticorruption rules. Enron and its sequels have reinforced the main hypothesis: it is in the best interest of the private sector to apply

35、 self-imposed anticorruption measures (Howlett and Rayner, 2006).Additionally, in light of a wide range of events linked to labor, health and safety rights (Belcher, 2002) and environmental concerns (Elkington, 2007), broad discussions have emerged to address the role of the corporation in society,

36、its ethical standards, corporate governance practices and management decisions systems (Bonn and Fisher, 2005). As a result, primary and external stakeholders around the world compel companies “to respond in a more responsible and transparent way to environmental pressures” (Waddock et al, 2002: 132

37、). Due to growing evidence of rampant consequences of bribery on development, poverty, inequality and human suffering2, anticorruption has become a “hot issue”. THE NEW FRAMEWORK: WB-GAC (2006-08).Some evidence of change may be perceived in the “new generation” of anticorruption strategies (Coleman

38、and Perl, 1999), such as the WB-GAC. In comparison to past reports FCPA (1977) and OCDE (1997), which simply conceptualized the corporation as the agent who pays bribes, the WB-GAC includes a multidisciplinary approach, focusing on governance and IC.FCPA (1977), which makes extraterritorial bribery

39、explicitly illegal for US companies and creates requirements for greater transparency, and OECD (1997), an attempt to extend sanctions around the world, present three main coincidences: - Both try to legally avoid corrupt behavior. Like Rose-Ackerman (2002), they consider that a firms main argument

40、to reject corruption is their status as a legal person operating at the state suffrage. Attitudes or values, which have been essential in countries like Hong Kong, are largely neglected. - While both welcome the contribution of companies, the role of self-regulation and private codes is left unaddre

41、ssed.- Both recognize the role that governments play in the prevention of bribe solicitation, but neglect the analysis of the ICs impact.Contrarily, the WB-GAC (a) refuses the monopoly of legal focus, admitting that champions of reform may be found inside and outside the executive branch of governme

42、nt, including the business community; (b) names the corporation a “crucial ally”; and (c) focuses especially on the improvement of the IC. Addressing the private sector, the WB-GAC (2006: 12-14) begins describing the divergence of incentives. In the middle and long-term, corruption increases vulnera

43、bility and uncertainty for firms, and has a detrimental impact on their dynamism and growth. Consequently, MNCs have a strong incentive to reject venal officials as strategic partners. But in the short-term, corruption creates lucrative opportunities with low risk for unethical corporations. Many pr

44、ivate businesses, “including some from developed countries, themselves engage in corrupt practices” (WB-GAC, 2006:12).If integrity and incentives were always positively correlated, debate would be superfluous (Rose-Ackerman, 2002). However, divergences affect firm behavior. Thus, in order to deter t

45、he last type of behavior and to fuel the first, the WB-GAC establishes three type of actions. 1. Actions from government to private sector. The report recognizes the main role played by the IC and indicates that some IC features make firms vulnerable to corruption in host countries. Thus, it propose

46、s to help governments to “eliminate excessive red tape and non-transparent regulations, reduce monopolistic practices, transparently and competitively privatize state-owned business and banks, facilitate the entry of small and medium enterprises” (WBG, 2006:12). 2. Actions that encourage a joint pub

47、lic-private coalition for reforms. A public leadership coalition, with “the International Financial Corporation and Multilateral Investment Guarantee Agency working directly with the private sector to introduce ethical corporate practices” (WBG, 2006: 12). 3. Public sanctions. Measures to raise the

48、cost to businesses that continue to engage in corruption. The WB-GAC is already in force. Its term, commencing in 2006, is proving itself to be long and problematic. It has included a WBG-IMF forum; internal and external feed-back, and consultation with governments, donor agencies, etc. The last ver

49、sion (October 2007) will likely be definitively approved in 2008. Some factors related with IC and firms have been in dispute. For example, while in the last version transparency continues to be demanded, references to red tape and monopolistic practices have disappeared and national conditions have

50、 come to the forefront: each country “will have explicit governance indicators to monitor for positive change” (p. 18). In fact, a critical question remains: must the ICs improvement and rigorous international monitoring be correlated? Can corporation collaboration be required without assuring the c

51、ollaboration of host countries? A second conflictive factor is the reform-leading agent. In the cited feedback, some countries have refused the multilateral approach in an attempt to minimize the business sectors contribution, as the next comment shows: “The private sector have vested interests of t

52、heir own (money-making), and this will hamper aid effectiveness to a great deal” Respondent type: Government; Region: South Asia.THE DEBATE AROUND MECHANISMSThe new generation of anticorruption effort is built on the involvement of both private and public actors, which, being not mutually exclusive,

53、 must cautiously work to develop measures that harmonize law, social and national interests, self-regulation, firm freedom, etc. (Jordan et al, 2005). In the achievement of the ultimate objective the reduction of bribery through a mix of supply-demand instruments discussions have focused on two diff

54、erent elements:a) Who must lead the effort of developing initiatives, defining standards, adopting rules that force corporations toward integrity and monitoring important exporters and producers.b) The obligatory character of removing impediments that make corporations victims of their environment.I

55、n relation with these questions, we identify two positions: the bribery environment position, which requires IC improvements and a joint public-private consensus led by international agencies, and the bribe giver position, which defends the effectiveness of the corporations self-regulation, independ

56、ently of IC improvement. The bribery environment positionThis position maintains that an individual official may not change pro-bribery IC elements, neither an individual corporation is able to impact the national culture and law (Schechter, 2007). Whereas legal deterrence through legal sanctions ma

57、y be needed to succeed (Zang, 2007; Sung 2005), or “practices are so ingrained in a culture that there seems to be neither need nor realistic opportunity for change overnight” (Gjessing and Syse, 2007: 431), any substantial progress requires the collaboration between the global corporation and the h

58、ost countries (Potts and Matuszewski; 2004). This is in conformity with Bthoux et al (2007), who find that business codes attempt to prohibit bribery, referring to types of conduct that violate public regulations and law. This position underlines that public-private collaboration could require the a

59、cceptance of external actors such as international agencies. Following the US example, all the developed European and American exporting countries have introduced domestic legislation following OECD (1997), and even UN (2004) conventions. Many former bribery-tolerant industrialized countries (i.e.,

60、France and Germany) have rectified and now reject the tax-deductibility of bribes. However, commitment cannot be measured by simple participation in conventions. While the US is engaged in combating bribery even if corrupt IC in host countries remains unchanged, the political will of other countries

61、 has not been as strong. SenGupta (2006) shows that the US has brought action against 35 foreign bribery cases since 1998, France only three and Germany just one case. In the UK there have been no prosecutions since 2002. This demonstrates that public-private collaboration, though necessary, is not

62、a sufficient condition to prevent corruption.In the search for explanations, and aligned with recent literature, the vulnerability of the firm to IC conditions is often signaled. In the literature, IC is referred to as the set of present or expected institutional, policy and regulatory environmental

63、 factors that may influence the returns and risks of a corporations investment (Dollar et al, 2005). IC depends on macro-economic, infrastructures and institutions or governance factors.The research on bribery has put more attention on how the governance block (property rights protection, transactio

64、n costs, coercion, bureaucracy harassment, poor governance and corruption (Batra et al, 2000) affects firm performance, and on the status of bias caused by the mobility of firms across regions and countries. But results are inconclusive, correlations tend to be unclear and data must be interpreted w

65、ith caution. For instance, while Dollar et al (2005) find a robust link between financial services and firm performance, they do not find that general measures of corruption or poor government explain differences in outcomes across countries, contrary to the results presented by Batra et al (2000).

66、However, the literature continues to emphasize the vulnerability of the firm (Demirguc-Kunt et al, 2006). Authors consider it unjustifiably harsh to prosecute or denounce an individual firm for paying bribes in countries whose IC factors prevent the corporation from not engaging in corruption (Wu, 2006; Collins and UhlenBruc