National Competitiveness and Perception of Corruption

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ABSTRACT

This paper examines the relationship between a nation's economic competitiveness and the perceived level of corruption in the form of bribe taking in that country. In analyzing data from the World Competitiveness and Corruption Perception Index over four years for 51 countries, there is strong evidence that highly competitive countries are less likely to be corrupt and vice versa. The results indicate that corruption is a significant factor affecting national competitiveness. Implications for public and corporate policy are discussed.

Keywords: Bribery, Corruption, Corruption Perception Index, Competitiveness, Foreign Investment

INTRODUCTION

The advent of the forces of globalization has led most nations of the world to open their economies to market forces. This has also enabled international capital and expertise to flow across borders. Many national governments eager to obtain a share of such capital and expertise and to spur economic growth have put in place public policies and programs that encourage private enterprise and foreign investment. Potential investors now have a wider range of countries to choose from to locate their business facilities or to put in their resources for profit. Not all countries are equally attractive to foreign investors; some are more than others. Increasingly, countries are being calibrated on the basis of how competitive they are as places to do business in.

The conduct of international business in many places of the world is accompanied by bribe giving. Bribery is defined as "the offering, promising, or giving something in order to influence a public official in the execution of his/her official duties" (OECD Observer, 2000). Bribes take the form of money, other pecuniary advantages, such as a scholarship for a child's college education, or non-pecuniary benefits, such as favorable publicity. Bribery has been one of the enduring ethical challenges in international business. It is generally acknowledged that bribery undermines public and business confidence, breeds cynicism, increases inefficiency, and leads to other crimes such as money laundering (Theobald, 1990). Honest businesses lose out in obtaining contracts because of their refusal to acquiesce to corrupt practices. Bribes also add to the costs of doing business and extensive corruption in a country tends to depress investment and economic growth (Mauro, 1997).

Given this, the competitive status of a nation can be hurt if bribery is part of the prevailing culture of doing business in that country. Rampant bribe taking in certain countries will likely discourage investment and orderly business activities. Investors are likely to bypass such countries for those that are perceived to have a more ethical business climate. Thus, the competitiveness of a nation can be affected by the level of bribe taking activity prevalent therein. It is this relationship that this paper examines.

INTERNATIONAL COMPETITIVENESS

As national economies have deregulated, privatized, and opened up to international competition, countries have become conscious of the need to adopt policies that will create a favorable climate for business activities and offer incentives that will encourage foreign investments. Countries are often in a race with each other to attract resources to enhance their economic wellbeing. Competitiveness of nations may be defined as the facts and policies that shape the ability of a nation to create and maintain an environment that sustains more value creation for its enterprises and more prosperity for its people. It implies that businesses depend a great deal on the national environment in which they operate. However, competitiveness is not a zero sum game - enhanced competitiveness of one country does not have to come at the expense of another; many countries can improve their productivity and prosperity at the same time. Of course, some countries support competitiveness more than others by actively creating and maintaining a climate that facilitates the competitiveness of firms and encourages long-term sustainability. …