The Causes and Consequences of Bribery in International Business

By Shahabuddin, Syed | International Journal of Management, June 2002 | Go to article overview

The Causes and Consequences of Bribery in International Business


Shahabuddin, Syed, International Journal of Management


Corruption has economic and social effects on people and business around the globe. It lowers economic growth, discourages investment, and marginalizes and restricts global markets. It erodes support for economic aid and puts a heavy economic burden on the poor and lowers the standard of living of the people. Countries are concerned and are trying to combat corruption. Many sociologists, political scientists, and economists know the reasons for corruption, and many methods have been suggested to combat it. However, the process is very slow and ineffective. My article discusses the effect of corruption and the methods for controlling it.

Introduction

The world is becoming one integrated global market mostly dominated by U.S. and Japanese companies. That is, these dominant economies sell and produce their goods in developed and developing countries.

As more and more companies try to enter the global market, competition develops among companies of different countries. In order to compete, these companies try to explore markets in many developing countries. Therefore, business and country leaders are focusing on removing obstacles to global markets. A major barrier is the existence of corruption in many countries. According to the chairman of an anti-bribery task force for OECD (Organization for Economic Cooperation and Development), corruption is widespread worldwide and is growing.

Corruption has been considered an evil for centuries by people in both developed and developing countries. The birth of a global market has brought it into a new prominence. Multi-national companies and government officials agree that, besides being a social evil, it has an impact on all other aspects of the economies. That is, corruption in international business transactions has a devastating effect on the world economies. It increases the risks and cost of doing business and reduces the trust of investors. It raises questions about the integrity of all the business executives conducting business in corrupt countries. It eliminates the economic benefits of free trade and privatization of economies by restructuring investment to companies who can pay the largest bribes. Many countries, where businesses are allowed to bribe, have increased their investment in other countries.

Bribery

It is hard to define bribery or corruption as they take many forms. Bribe means payment or other favors to induce others to act in favor of the bribe givers. Most are given to public officials to make them change the rules or break the laws that were made for the common good. As they neglect the common good for private benefit, they violate the public trust and become accomplices of the evils.

There are two types of bribes: whitemail and lubrication. Whitemail bribes are used to induce an official to perform an illegal or uneconomic act. These types of bribes are given to politicians or major government officials. They are common in many developed and developing countries.

Lubrication bribes are used to expedite or facilitate normal governmental approval of a legal transaction. They are routine in many developing countries and are solicited mainly by minor government officials.

In some countries, however, officials resort to extortion. Extortion is an act by an official to seek payment from an individual or corporation to perform a lawful act.

Whether a society considers bribery to be morally wrong depends on its culture. Some cultures encourage children to grow up with an intention of working for the government so they can accumulate wealth through graft or favors. Other cultures consider taking bribes or favors to be immoral and unethical. Thus, culture determines whether a country will condone bribes. Therefore, it is difficult to generalize ethical behavior around the world.

As a result, the majority of multinational corporations are facing a dilemma of conflicting ethical standards. There are standards, however, by which to judge whether an action is ethical or not. The standards developed can to be applied to test whether it is a violation of moral principles:

1. Is it legal? One should ask, it is against the law or company's policy? Obviously, a bribe is illegal in every country, and many countries have established an anti-corruption department to enforce laws against public officials taking bribes. Unfortunately, in some countries, the anti-corruption officials are themselves corrupt. As a result, no laws are enforced and a bribe has become a normal activity in dealing with government officials.

2. Is it balanced? One should ask the question: is my action fair to all concerned? Obviously, giving a bribe means asking for a favor that results in unfair advantage to the bribe giver. In almost every case of bribery, a bribe giver benefits at the cost of another person or group of persons. Therefore, no bribe is balanced.

3. How will it make me feel about myself? This deals with the questioner's conscience. People who take bribes consider them ethically, socially, or morally acceptable. Countries where bribes are the norms, they are socially condoned. Society establishes ethical or moral norms. Thus, in order to stop bribes, the society has to change.

According to Control Risks Group (CRG), a London-based consulting firm, some business sectors are more prone to corruption than others. Sectors that are most prone to corruption are oil, gas, and mining, and defense and government procurement contracts. These sectors involve large amounts of money.

Corruption can be discouraged by dissuasion or prevention. Dissuasion involves punishment; prevention means reducing the power of the government by transparency, competition and reducing official discretion.

People have suggested various ways to prevent bribes. They are:

- to promote genuine competition

- to create a balance between regulations and professional discretion

- to build new oversights - audit, investigation, and inspection

- to change the reward system

- to lower tariff and trade barriers

- to make public activities transparent

- to encourage public input on the performance of civil servants.

However, many bribe receivers have come up with ways to circumvent the process. They are:

- to include the bribe in the bid

- to make the bid specifications favor only one type of bidder

- to require pre-qualification before the bid, thereby allowing the official to limit who can bid

- to require conditions which are difficult to be met by some suppliers.

Despite these methods, a non-bribe giver may receive a bid. A corrupt official, however, could still demand a payoff either by threatening to reject the bid or not awarding future bids.

It is hard to make and enforce laws against an action that society considers acceptable. Some might say that giving business gifts could be considered bribes. True, in the minds of some they could be considered bribes. However, one can judge whether a gift is a bribe by using the following test:

- who is receiving the gift? If the person receiving the gift has some power over the person giving the gift, then it might influence the decision of the receiver.

- when is the gift given? Timing is critical. If the gift is given at the time when the receiver is making a decision affecting the giver, then its puipose may be to influence the decision maker.

- what is the value of the gift? If the gift is nominal, then it may not have any effect on the decision. However, large gifts could affect the receiver.

Moody-Stewart has developed three criteria to measure the corruption appeal: the size of the bribe, the ability to cover up the bribe within the deal, and the speed of payment.

Bribery and Its Effect

Widespread bribes have a devastating effect on business and the economy. Unfortunately, it is usually the government that encourages corruption despite the fact that it is its role to improve the economic well-being of the people. Furthermore, in many countries, the government controls many major economic activities that directly affect the well-being of the people.

In addition, the government controls licenses that allow businesses to receive exclusive control of business. Thus, licenses may be issued to those who are willing to pay hefty bribes to the official issuing licenses. Many businesses are willing to pay bribes for exclusive rights to the market segment. As a result, paying bribes is cheaper than spending money on research and development to improve products to be competitive.

Government officials have control over many economic or social activities of the society. In a corrupt society, only bribes can speed up the work or the issue of licenses or receiving a monopolistic market position. All these controls allow a few businesses to get rich at the expense of the economic well-being of the society.

The type of corrupt system can also harm the economy. If the corruption is structured, businessmen know that bribing the desired person will obtain the right result. Thus, economic activities take place without much disruption even with corruption. On the other hand, if the corruption is unstructured, businessmen do not know when to bribe or how much, and if they bribe there is no assurance that the result will be achieved.

Bribery is an attempt to earn income through unfair means. As a result, the receiver of the bribe acquires money wealth without any labor effort, and the giver receives unfair economic advantage. Both parties gain income without much effort. The nation's productivity goes down, and the money supply increases. The giver and the receiver spend their money on products which are in short supply, thus resulting in inflation. However, in a majority of the cases unearned disposable income is spent on luxury goods, which usually are imported. As a result, import increases, thus resulting in a trade deficit. Since most of these developing countries do not have enough foreign currency reserves, the pressure mounts to devalue the currency. The devaluation, which becomes inevitable, results in higher inflation. The higher inflation forces the corrupt government officials to ask for more and larger bribes. Thus, the cycle of inflation continues.

As a consequence, to pay for the trade deficit, countries borrow from IMF and the World Bank. However, both IMF and the World Bank know that these countries have done nothing to address the internal economic conditions to improve the economic situation. If money is lent, the borrowed money is mostly wasted or stolen by the corrupt government officials. With this additional income, the officials' purchasing power further increases. They demand more and better luxury goods (mostly imported). The trade deficit worsens and the government, in order to pay for the trade deficit, borrows more. Thus, the debt mounts, along with large amounts of interest. To bail them out, IMF and the World Bank lend them more money. Thus, the vicious cycle of corruption continues without any control.

Corruption abroad hurts trading countries. It serves as a trade barrier and is an unofficial tariff on export.

Bribes undermine democratic accountability. Public officials are not held accountable; as a result, politicians resist leaving lucrative offices and find ways to keep themselves in office. Public trust is lost in the government and the "democratic" system keeps them in power.

Bribes prevent open markets and restrict the benefits of trade agreements. In addition, public officials resist negotiating the liberalization of the economic system for fear of losing control. Businessmen and some government officials know the effect of corruption on the economic well-being of the people, but they still continue to indulge in it.

International standards and cooperation can help in reducing the instances of bribes. If countries are determined to fight corruption, they will succeed. There are, however, many reasons that prevent countries from combating corruption, such as insufficient resources, lack of know-how, and the inability to understand the effects of corruption.

Economic Effect of Corruption

Corruption reduces economic growth, scares away foreign investment, and often channels funds into "white elephant" projects that have no economic benefit. The World Bank estimates that widespread corruption can reduce a country's economic growth rate by up to I percent as well as reduce inward investment.

Investors are reluctant to invest in corrupt countries for fear of losing their investment. According to Standard and Poor's rating agency, there is an 80 to 100 percent chance that within five years investors will lose their investment in corrupt countries. According to them, for instance, there is a 60 percent chance of losing investment in Egypt and Syria, and a 80 percent chance of losing investment in Algeria, Jordan, Morocco, and Turkey.

Mauro (1995) found a negative and significant relationship between corruption and the investment rate. According to Mauro, a one-standard deviation improvement in the corruption index can increase the investment rate by almost 3 percent in GPD. In addition, he found that a one-standard deviation increase in bureaucratic efficiency could increase GDP by 4.75 percent. His study also indicates that a decrease of one-standard deviation in corruption can increase the annual growth of GDP per capita by 1.3 percent. Clearly, corruption affects growth by lowering the rate of investment or misallocating investment among sectors.

Corruption costs society because important economic and social decisions are made for ulterior motives. As a result, according to Sammons (1999), "the cost of goods and services increases the debt of poor countries and carries with it recurring debt-serving cost into the future." In addition, the approved projects may have high economic cost with low economic benefit. Many analysts have found that corrupt governments spend less on health and education and more on public works projects. Studies have shown that spending on education will rise .5 percent as a share of GDP if a country reduces the corruption index by 2. The education level of a country determines the level of economic growth.

According to Sammons, there are many costs of corruption due to "allocative inefficiency." Sammons identifies the following:

- It diminishes the total budget available for legitimate purposes.

- It damages the administrative integrity, and high standard of probity.

- It results in substantial loss as more time is devoted to undo or outdo the system than evaluating the feasibility of the project.

- It encourages firms to hide revenue, undercutting the state's ability to raise revenue, which leads to raising taxes on fewer and fewer taxpayers. This forces more companies to hide their revenue or go underground, resulting in raising taxes further.

Corruption leads to a progressive loss of efficiency for firms specializing in public sector activities. As most of the firms have a hold on public sectors, there is no incentive for them to invest in new technology or products.

Some argues that corruption leads to more bureaucratic delays. That is, individuals offering speed money to officials establish a custom which encourages officials to artificially delay action until a bribe is received. This results in more red tape for the economy as a whole. The problem with corruption is that once a company gets business through illegal means, it becomes a pattern and is difficult to break.

A survey in 1997 by the World Economic Forum's Global Competitiveness in 59 countries found that management was spending more time negotiating licenses and other government related activities in countries with a higher corruption rate.

Can Corruption be Stopped?

Corruption is an evil that has destroyed many economies and has brought miseries to the common man. But despite its destructive power, government officials in many countries are accepting bribes to build their own wealth. A survey of 3600 firms in 69 countries by the World Bank found that 40 percent of the businesses admit to giving bribes to officials for receiving contracts. The United Nations World Report states that 15 percent of all companies in industrialized countries paid bribes to win or retain contracts. Of these, 40 percent were in Asia and 60 percent were in the Soviet Union countries. Recently, Brazilians discovered that 70 percent of outside aid ended up in the hands of politicians.

The extent of corruption ranges from rare to widespread to systemic. Rare incidences can be easily detected and prosecuted. Widespread corruption is difficult to punish because of the cultural acceptance and thus lack of support from the public at-large. Systemic corruption is hard to detect as it is covered in the maze of bureaucratic procedures. Therefore, the approach to stopping corruption depends upon the extent of the corruption.

Industrial deficiencies, such as political instability, bureaucratic procedures, and weak judicial and legislative systems, encourage corruption. The question is: can it be stopped? Many private organizations, such as Transparency International (TI), are trying to increase the public awareness of corrupt practices around the world. One of the weapons used is the publication of the Corruption Perception Index (CPI). The Corruption Perception Index published by the Internet Center for Corruption Research ranks countries according to the perception of prevalence of bribes as observed by businessmen and other professionals. The index ranges from 10 (most clean) to 0 (most corrupt). Denmark received a score of 10 and many developing countries received a score of close to 0.

Some blame the bribe givers for the widespread corruption. Thus, to identify countries that encourage giving bribes, Bribe Payer Index (BPI) was developed. The index, similar to CPI, ranges from 10 (least givers) to 0 (most givers). BPI among countries varies from the 8.3 to 3.1. Sweden, with 8.3 BPI, was the least willing to bribe, while China, with 3.1 BPI, was considered to be the most willing to bribe.

The United States has passed the Corrupt Practices Act that prevents American companies from bribing foreign officials. The United Nations has held conferences to discuss the corruption problem in the world. As a result, an international treaty to ban bribery has been developed. It is pending approval by the member countries.

If corruption continues, the World Bank has threatened developing countries with the end of billions of dollars in loans. The new World Bank guidelines require the cancellation of loans if fraud or corruption is found. Companies caught in corruption will be prohibited from future projects.

In addition, the OECD Convention attendees (29 OECD member countries and 5 nonmembers countries) signed a treaty on December 17, 1997, that will take effect in 1999 to combat bribery of foreign public officials in international business transactions. The agreement requires all the signatories to ensure the passage of corruption laws by member countries' legislatures. One of the weaknesses of the OECD's treaty is that it does not cover foreign subsidiaries and offshore centers in bribery transactions. Furthermore, it only covers the supply side of bribery and not the demand side.

OECD supports member countries in improving their system of government. The purpose is to help monitor the broader public service environment that will promote integrity and prevent corruption.

A new legislation, the "Fair Competition in Foreign Commerce Act," has been introduced in the U.S. Congress to ban corruption relative to foreign aid funds. It will require the recipient countries to develop anti-corruption programs.

The Organization of American States has adopted the Inter-American Convention Against Corruption that criminalizes transnational bribery and provides for extradition of corrupt officials.

The World Trade Organization (WTO) has developed rules for prevention, such as Custom Valuation, pre-shipment inspection, and transparency of actions.

Corruption is the result of systemic failure and a management problem. It is indicated by nonexistent or weak legislation and lack of enforcement. As a result, OECD suggests a variety of tools to combat the corruption through control and management techniques. It has identified systems, tools, and conditions that will help in promoting ethical standards in the public sector. In addition, it has provided a checklist and principles that will help guide managers on how to review their management.

Those who point a finger at corrupt countries are told that Western societies took centuries to control corruption. It may be true that some countries took longer to control corruption, but others have been able to do so in a short period of time. Those who reduced corruption in a short period appointed Independent Commission Against Corruption, and implemented broader economic, cultural, and civil service reforms. Botswana, for example, with its sound economic and public sector management, has successfully reduced corruption.

Many public officials know the root causes of corruption. A survey of public officials indicated economic deregulations and punishing public corrupt officials as the most effective tools in reducing corruption. The anti-corruption watchdog agency, however, was not considered an effective tool in reducing corruption. The reasons for the failure of this agency were its control by politicians, dishonest leadership, and lack of punishment.

Some might say that corruption exists because of the economic and social conditions in a country. Poverty and low civil servants' salaries are some of the reasons used as justification for bribes. In addition to these conditions, there are many opportunities for corruption. As the government controls many economic activities, it provides opportunities for businesses to obtain monopolistic power by obtaining exclusive licenses. Thus, it encourages businesses to bribe officials for the exclusive control that results in a high cost to the society.

Corruption encourages more control. In most cases, accountability is non-existence or weak, laws and ethics are poorly developed, and enforcement is lacking. According to Mauro (1998), corruption can be eliminated if reforms are undertaken in a sudden and forceful manner by the highest level of government.

Regardless of these efforts, corruption is going to exist in countries where public officials have wide discretionary power with little accountability and when there is no enforcement of laws.

The solution is to curtail official discretionary authority and to held them accountable. In addition, the price of getting caught has to be more than the reward of bribes.

Furthermore, employees have to be evaluated for their performance and an appropriate action taken for misconduct.

Conclusion

Everyone recognizes that corruption is an evil that affects rich and poor countries, public and private institutions. It influences economic growth and the social and moral fabric of a society.

Many economic studies have shown that it reduces the rate of economic growth through lower investment and misallocation of resources. As a result, it reduces the standard of living of the people. However, there are no studies that show how it damages the social and moral fabric of a society. But it can be surmised that the level of corruption is related to the value system of a society. Once values are affected, it changes the culture, which is then prone to corruption.

The consequences of corruption have become more transparent as a result of international trade. That is, countries, developed or undeveloped, democratic or undemocratic, have to face this issue. Countries around the globe are pressed to clean their house in order to become a member of the international economic community.

Public officials and the public in general are aware of the reasons for corruption. Many experts have suggested ways to control corruption. Most developing countries blame the poor countries for corruption. However, many developed countries condone bribery of their multinational companies. Thus, it is very difficult to preach values that lack credibility. Furthermore, developing countries have never tied giving development aid to the integrity and effectiveness of the receiving countries. All their advice sounds hollow when they insist on controlling corruption.

Regardless, it is still incumbent on the developing countries to control corruption. However, political and social structures are prone to corruption and they need to make concerted effort to control it. The change can only come from the political leaders in the countries. Even though the political leaders may want to control corruption, it can only take hold by instituting fundamental reforms. This requires teaching ethics in schools and by example from political and business leaders.

A survey by Huberts (1998) found that most experts consider the norms and values of politicians (98.4 percent in developing countries and 88.4 percent in developed countries) as one the major reasons for corruption. The second most impoitant reason (93.3 percent in developing countries and 87.2 percent in developed countries) was lack of control, supervision and tradition. These experts have suggested many anti-corruption methods. However, the experts from the developing countries agree that internal control and supervision, information comparison, example set by top management, and creating independent institution will be the most effective way to control corruption.

Many ideas have been suggested:

- All institutions need to be involved in combating corruption.

- Public officials and institutions should be subjected to greater transparency.

- Development aid should be tied to how effectively the receiver countries having controlled corruption.

- Most public service institution should be privatized.

-All public officials and institutions should be evaluated annually and held accountable for their action with appropriate penalties for misconduct.

The literature is full of ideas for controlling corruption and many articles present some of those ideas, but it still requires people to bring about the change. The change, however, is difficult in a society where culture has accepted corruption as norm of life. Thus, to bring about the change requires a complete overhaul of the culture. This is, in my opinion, impossible unless the society is made to realize through economic pains that corruption costs society economic opportunity and a better life.

[Reference]

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[Author Affiliation]

Syed Shahabuddin

Central Michigan University

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