A Multinational Analysis of Corruption and Economic Activity

By Smith, L. Murphy; Gruben, William C. et al. | Journal of Legal, Ethical and Regulatory Issues, January 1, 2013 | Go to article overview

A Multinational Analysis of Corruption and Economic Activity


Smith, L. Murphy, Gruben, William C., Johnson, Leigh, Smith, Lawrence C., Journal of Legal, Ethical and Regulatory Issues


ABSTRACT

The relationship between corruption and economic activity is a complex one. The purpose of this study is to examine 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). Transparency International publishes annually a ranking of countries according to the Corruption Perceptions Index (CPI). Examples of corruption activities include: (1) bribery, (2) corporate fraud, (3) cartels, and (4) corruption in supply chains and transnational transactions. Corruption is associated with a variety of problems, such as impeding economic development. Effective corporate governance that restricts corruption benefits not only the business firm but also economic activity in host countries. Results of this study offer insights into the consequences of corruption on economic activity. Generally lower-corruption countries have experienced significantly less unemployment than higher-corruption countries. In addition, gross fixed capital formation and foreign direct investment were more favorable (though not significantly different) for the lower-corruption countries.

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.

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