A Multinational Analysis of Corruption and Economic Activity

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INTRODUCTION

Corruption can be a serious detriment to economic activity and progress. The relationship between corruption and economic activity is complex. The purpose of this study is to evaluate the relationship in selected countries between level of corruption and economic activity, using data obtained from the Organization of Economic Cooperation and Development (OECD) and Transparency International (TI). Economic variables examined in this study include gross domestic product, unemployment, gross fixed capital formation, and foreign direct investment. The study will seek to add new insight into a fundamental research question: Does corruption negatively affect economic activity?

Transparency International publishes annually a ranking of countries according to the Corruption Perceptions Index (CPI). Technically, the CPI is a measure of 'perceived' corruption but is regarded as a close proxy for actual corruption. Examples of corruption activities include: (1) bribery, (2) corporate fraud, (3) cartels, and (4) corruption in supply chains and transnational transactions. These and other types of corruption are associated with a variety of problems, including economic development. Effective corporate governance that restricts corruption benefits not only the business firm but also economic activity in host countries. Results of the study will provide insights into the consequences of corruption on economic activity.

Results are mixed but reveal some notable relationships between corruption and economic activity. At the macro level, these relationships should be considered by policy makers who are considering changes to laws and regulations, in efforts to combat corruption and facilitate economic activity and progress. At the micro level, these relationships should be evaluated by corporate managers who are making decisions on where to set up business operations and will want to consider how corruption might affect the risks of doing business in a given business location.

REVIEW OF RELATED LITERATURE

Corruption is one of the most common and severe ethical problems in global business today (Everett et al., 2006). It often starts with the payment of bribes or controversial political contributions to government officials but can extend to other corrupt activities, including kickbacks, undisclosed agreements and insider dealing. Many corrupt activities have a common, and often criminal, purpose: they attempt to influence decision-makers without disclosing such actions to the public (Ryan, 2000). As such, these activities are abuses of power (Weber, 2004), undermine free trade and good governance, erode the rule of law, limit economic and political advancements and have devastating effects on various stakeholders (Everett et al., 2006).

Many companies believe that they compete with firms that make corrupt payments; consequently, these companies also make corrupt payments in order to remain competitive with others and facilitate transactions. When corruption is customary in a country, companies have increased incentives to make corrupt payments and often become participants in an ongoing cycle of corruption. These circumstances, however, do not justify such actions, and most ethicists agree that such payments are morally objectionable (Weber, 2004).

Decisions based on corruption, rather than value and merit, distort markets and reduce economic efficiency (Mauro, 1995). From a utilitarian perspective, such actions hinder overall economic development, thereby reducing utility. Corruption violates the principle of rights, because such activities prevent fair competition (Baron, 2010) and encourage individuals to use their circumstances for personal gain, which violates a duty to their principals. Furthermore, corruption impedes participation in the political process, a fundamental human right (Weber, 2004); as such, it also violates the principle of justice. Corrupt payments prevent government officials from making impartial decisions, affect the equality of political rights and reward recipients on the basis of their position or power rather than their actions. …