Academic journal article Management International Review

Corruption and Private Participation Projects in Central and Eastern Europe

Academic journal article Management International Review

Corruption and Private Participation Projects in Central and Eastern Europe

Article excerpt

Abstract This paper investigates the role of host-country corruption in private participation projects in emerging markets. Privatization activities, especially in infrastructure development, were traditionally inaccessible to multinational enterprises, but they are nowadays encouraged in many countries. Prior literature on corruption finds two contradictory ("grease" and "sand") results when examining the consequences of corruption on investments. Drawing on a sample of 1185 projects from 1997 to 2013 in 18 Central and Eastern European Countries, our results show that higher levels of host-country corruption are associated with greater probabilities of failure. Our results also show that including local investors in the ownership structure of the project weakens the negative effect of corruption by reducing the liability of foreignness. In contrast, being a publicly traded project has no moderating effect in the effect of corruption in this region. Therefore, our results highlight that not all common strategies to deal with corruption are equally effective in this region.

Keywords Private participation projects [??] Corruption [??] Emerging markets [??] Central and Eastern European countries [??] Infrastructure projects [??] Uncertainty

1 Introduction

Private participation projects are defined as: "projects that have substantial contributions from private (domestic or multinational) enterprises" (Jiang et al. 2015, p. 295). Private participation projects are a "concession-oriented" (i.e. private sector is involved on a contractual basis and operates as "contractor") type of public private partnership, compared to other "organizational cooperation-oriented" projects in which there is a shared responsibility of public and private entities (Hodge and Greve 2007; Klijn et al. 2008).

Although privatization activities were historically largely inaccessible to multinational enterprises (MNEs), the situation today has radically changed and many governments actively offer this type of investment opportunity to MNEs (Henisz et al. 2005). For example, private ownership in infrastructure development has significantly increased, most notably in emerging economies (Ramamurti and Doh 2004).

Prior studies on private participation projects have focused on various topics including privatization method (Djankov 1999), state ownership (Doh 2000; Doh et al. 2004; Inoue et al. 2013), host country reforms (Henisz et al. 2005), political stability (Jiang et al. 2015) and government credibility (Ramamurti 2003). However, these studies largely overlook the role of corruption. In addition, most of these studies analyse projects in developed economies and the few that are focused on emerging economies mostly neglect Central and Eastern European countries (CEECs). This is a shortcoming, given that CEECs constitute an increasingly attractive region for investors and have thus witnessed a significant increase in foreign direct investment (FDI) flows in recent times (Gelbuda et al. 2006; Jimenez et al. 2013). Simultaneously, scholarly interest in this specific region has also grown and several studies highlight the importance of property rights (Smarzynska 2002; Bevan and Estrin 2004), industry (Resmini 2000), productivity and spillovers (Holland et al. 2000; Damijan et al. 2003; Peneder and Stehrer 2007), political risk (Jimenez et al. 2013) or knowledge orientation (Manea and Pearce 2006) as critical determinants of FDI. The topic of corruption, however, remains under-explored as the literature has focused more on other emerging markets such as China, India or Nigeria (i.e. Collins et al. 2008; Agbiboa 2012).

This paper aims to address the aforementioned gaps in literature by analysing the role of corruption in private participation projects in CEECs. More specifically, we seek to answer the following research questions: (1) how does host-country corruption affect the success of private participation projects in CEECs? …

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