Corruption in International Business
1. Introduction
Despite the promulgation of anti-corruption laws, corruption remains a menace in international business. Historically, cases of corruption in the international business arena have dominated news headlines, mostly as international firms seek to enter foreign markets or maintain market share. According to Transparency International, all countries are corrupt, and it is only the degree of corruption that differs.
Corruption in international business can be associated with increasing global competition which encourages unethical practices aimed at gaining market traction and rigidity in international laws that motivate businesses to use short-cuts to navigate the legal systems. This makes it difficult for companies that are attempting to maintain integrity to compete in a fair environment.
Consequently, corruption has created a negative impact on international trade by debasing the relevance of business ethics, which has to a great extent created a culture of corruption in international trade. Corruption costs the economy significantly, and as reported by Transparency International in 2013, approximately $2.6 trillion or 5% of the world’s GNP is lost through corruption (Makhlouf, 2016). Companies also lose significantly through increased project costs.
Despite the consented efforts to deal with corruption that impacts international business, it is also notable that this remains the most difficult moral issue to fight. This is because as much there are smart anti-corruption strategies put in place across the world, the impact of corruption on international business still prevails. This paper is a discussion of corruption in International trade including the history, forms of corruption, the impact of corruption, anti-corruption strategies and possible solutions to corruption in international business.
2. History
Corruption in international business is as old as the business itself. Its origin can be associated with stringent rules placed on foreign entrants by different countries and the difficulties associated with penetrating new markets, such that bribing government officials helps companies in circumventing legal and social huddles (Eicher, 2012).
In the early days of international trade, bribery was not illegal, and it was considered normal for companies that sought to do or retain business in foreign countries to bribe government officials. Indeed, foreign bribes in some European countries were considered a cost of doing business and would be deducted from corporate tax returns.
As globalization continued to rise, the international business also grew at a high rate, and this propagated the growth of corruption. This was further enhanced by free market reforms led by international financial institutions and donor governments. More companies were investing internationally, and the trend of bribing government officials to facilitate entry of businesses or competitive advantage in the host country became a norm. It was so common that bribes were budgeted for as part of a company’s overseas operations.
In December 1975, the earliest international anti-corruption movement began when the U.N Assembly’s resolution titled “Measures against Corrupt Practices of Transnational and Other Corporations, their Intermediaries, and Others Involved” was passed (Ala’I, 2017). This resolution was a means of condemning corrupt practices that violated host country laws and regulations, by transnational corporations and others.
The UN Working Group was formed by the U.N. Economic and Social Council in the quest to provide recommendations for eliminating corruption. The Group called for international action, after discussions between 1976 and 1980.
The United States became the first country to implement anti-bribery law following the passage of the Foreign Corrupt Practices Act, which explicitly outlawed the practice in 1977 (SEC, 2012). The business community considered the decision by U.S. a wrong move because it would disadvantage the United States regarding competitive advantage, thus leading to major protest. However, the Act was passed, and this marked the beginning of a change in international business practices. Companies and individuals using the U.S financial system, according to the Act, were required to refrain from bribing or offering to bribe foreign officials for purposes of retaining or gaining business.
Interestingly, other countries did not follow suit until over 20 years later, an indication that bribery played a considerable role in international business. In Europe, corruption associated with foreign business was not given much attention as bribery was considered a necessary business expense. The same was applicable in a majority of countries, and it is not until recently when this perception changed globally, giving rise to anti-corruption laws that regarded bribing foreign officials a criminal offense (Hauser & Hogenacker, 2014).
In 1999, the OECD Convention on the Bribery of Foreign Public Officials in International Business Transactions came into being, with 29 members and five non-members signing the agreement. The convention provided guidelines for legislation implementation and tasked governments to criminalize active bribery in international business. This convention has led to the implementation of various other conventions across the world in a bid to fight corruption. Also, this has resulted in increased awareness of the negative impacts of corruption, and global efforts to prevent bribery and corruption have increased as observed today.
3. Forms of corruption
Corruption in international business can be classified into two broad categories: corruption associated with foreign market entry and corruption that influences competitive advantage within the market. Foreign market entry mostly involves complex procedures and barriers to entry, perpetrated by the bureaucracy and rigid rules and regulations governing the entry of foreign organizations. Once in the market, firms still face significant challenges in the form of laws governing foreign companies and high levels of competition from local firms. This may trigger corruption because government officials are aware of the frustrations faced by foreign companies and the owners are desperate to gain market traction. In both of the categories described above, corruption may be executed in various forms as follows:
Bribery: Offering money in exchange for a favor
Extortion: Asking for money or other payments in return for services
Kickbacks: Percentage of income given to an individual for facilitating a business process.
Facilitation payments: These are payments made with the aim of achieving faster results.
Grand corruption: Payments to politicians, policy makers, and other high-level officials.
Petty schemes: Payments to lower and middle-class officials with influence and power.
Influence peddling: Obtaining money with the promise of connecting an individual to power influencers.
Nepotism: Requiring that the company hires friends and relatives in return for favors.
4. Effects of corruption
Corruption can have grave consequences on international business as established in the discussion below.
Restricted entry
The corruption that impedes market entry can be a great deterrence for honest firms. In such situations, entry requirements are normally very complicated or marred by bureaucracy, thus creating room for corruption. This means that corrupt government officials may entice organizations to pay bribes to have the registration processes speeded up or some of the entry requirements overlooked (Eicher, 2016).
Unfair competition
Corruption affects the competitive environment by altering the competitive conditions. Corruption allows large corporations to control the market because they can bribe their way out of various legal circumstances or bypass certain regulations required in operation of their businesses (Makhlouf, 2016). This disadvantages honest dealers and thus creates an asymmetrical market environment. An example is where a corrupt company pays government officials to overlook the company’s potential environmental pollution and offer a clearance certificate in support of the organization’s activities.
Honest firms, on the other hand, may have to invest heavily in reducing environmental pollution to comply with the government requirements or have to pay fines for any deviation. When the two firms are compared, the corrupt firm has a competitive advantage because it will record higher profitability.
High prices for consumers
Where corruption is prevalent, it also means that organizations must incur high costs in meeting their objectives. This translates into higher costs of production, which are consequently transferred to the consumer for the company to make desirable profits. This affects not only customers but also the economy at large because of reduced customer purchasing power.
Poor quality products
Corruption creates loopholes for the production and import of inferior products. When companies can get away with poor standards and the use of subnormal raw materials through corruption, the customer suffers due to the poor quality of products they receive. Also, corrupt officials allowing cheap goods to be imported into the country could be risking the lives of citizens.
Corrupt business culture
Thede & Gustafson (2012) notes that self-sustained unethical behavior is likely to result from corruption in international trade. This is because the more corrupt deals are made, the higher the corruption prevalence becomes. According to Thede & Gustafson (2012), corrupt agents are more likely to interact with corruptible agents for business, and these behavioral patterns end up being sustained as the norm. This further worsens corruption to the disadvantage of honest agents. A corrupt culture tends to raise honest exchange transactions, such that it is more expensive to find an honest business partner due to higher search costs.
5. Corruption and economic growth
Corruption can have deleterious effects on economic growth. A majority of literature studies the negative impact of corruption, mostly as an ethical issue and a factor that impacts equilibrium of the business environment. Corruption is a costly affair, and it could limit economic growth, and as established by OECD (2014), corruption accounts for the loss of approximately 5% of the world’s GDP. This may be evidenced by inefficiencies resulting from corrupt practices. Also, the unequal distribution of income and resources that result from corruption leads to the rise of poverty rates (Makhlouf, 2016).
Corruption limits economic gains from international business. This is because only firms that are financially capable and which are corrupt get access to foreign market entry while the honest and less financially endowed are locked out. Based on this, corruption can be seen as a limiting factor for international business because the country may end up losing on entrants with great potential because the opportunities were given to those who could pay (Eicher, 2016). This further impacts domestic production opportunities due to obstruction of competition (Thede & Gustafson, 2012).
Corruption impacts governance and control of the business environment. The existence of corruption makes it difficult for authorities to implement regulations and controls, thus making governance difficult. Rotberg (2017) notes that it undermines the efficiency of state institutions and undermines a country’s regulatory environment, thus distorting decision-making processes. This results in a skewed business environment, and it becomes difficult to provide a level playing ground for all firms in the market including incentives.
6. Legal/political systems
A country’s legal and political systems greatly influence the prevalence of corruption and the extent to which this influences international business. In countries where strict measures are placed to control corruption, the levels of corruption are lower. This is because legal systems discourage such illegal practices. Further, political systems the level of control within government agencies, such that corruption may be lower in countries where the governing political body is committed to fighting corruption (Eicher, 2012).
In the initial periods of international business growth, foreign official bribery for purposes of business was not considered illegal in any country, and it is not until recently that legal and political systems were put in place to manage corruption. As a result, it is possible to state that the legal and political systems at the time perpetrated the occurrence of corruption, given that there were no laws to govern the practice (PBS, 2017).
The discussions above also establish that the main catalyst of corruption is the existence of trade barriers that limit the entry of foreign companies and effective business operations in the host countries, thus encouraging businesses to seek easier alternatives. By maintaining such conditions, governments played a significant role in promoting corruption, thus creating the menace observed today.
Given the high level of corruption emanating from international business, countries have taken different measures aimed at combating corruption. This represents a change in trends that has influenced legal and political systems through the development of laws that prohibit corruption and which promote prosecution of perpetrators. In the United States which was the first country to implement legal systems to deal with corruption, the Security Exchange Commission implements the Foreign Corrupt Practices Act through investigations and audit procedures aimed at discovering any possible bribery of foreign officials (SEC, 2012).
Political systems across the globe have also increasingly relaxed their international trade barriers to promote smoother processes that eliminate the need for corruption and bribery. According to Eicher (2012), reduction in trade barriers has been instrumental in reducing corruption because they eliminate incentives to corruption which were previously brought about by difficult processes, bureaucracy, and strict international business laws.
Countries are increasingly participating in international conventions that encourage the implementation of legal systems to curb corruption in their countries. Examples of popular conventions against corruption and bribery include the OECD Convention on the Bribery of Foreign Public Officials in International Business Transactions, United Nations Convention against Corruption, EU Convention on the Fight against Corruption, The Inter-American Convention against Corruption and the African Union Convention on Preventing and Combating Corruption among others (UK Anticorruption Forum, 2017).
These conventions have played a significant role in the development of more solid legal systems to deal with corruption and thereby improved international trade.
7. Anti-corruption strategies
Regulations: These are laws and regulations developed to govern international business and which ban the use of corruption to achieve business objectives in the international markets.
Trade barriers relaxation: This is aimed at promoting international trade by eliminating trade barriers that often limit business between countries. It may involve reducing taxes, registration charges, policies and regulations that limit international business. The result has reduced the incentive to give or receive bribes because the processes are not limiting.
Anti-corruption Conventions: These convene officials and business people from different countries to discuss and develop an agreement on how corruption can be combated.
Accounting practices and audit: To limit corruption, governments have continuously introduced strict accounting practices to discourage corruption. Public companies are also subjected to auditing to determine the existence of unscrupulous business practices.
Trade agreements: These are agreements between countries to eliminate barriers to trade and thus ease international business. This may be in the form of mutual agreements to reduce regulations for businesses from the countries involved or tying of conditions to the benefitting country’s contribution to the host country. An example is where developing countries ease trade barriers in exchange for infrastructure loans.
Mobilization of public opinion: This strategy involves civil society engagement, mostly through non-governmental organizations to influence private and public organizations to end corruption by demonstrating its negative impacts.
8. Cures of corruption
Corruption has been singled out as one of the moral issues that is difficult to control and which may never be successfully eliminated. However, efforts towards corruption elimination should mostly focus on the cause of corruption.
Internationalization: Internationalization is a possible cure for corruption in international business. This is the process of in which barriers are eliminated or at least reduced to promote trade. This would encourage free investment across the world, and this would reduce the motivation for corruption.
Leadership and political will: Leaders have the ability to influence the end of corruption in their countries through influencing moral behavior, promoting political good will and setting up laws that discourage corruption. Rotberg (2017) notes that leaders have influence over their followers and that they can influence their actions if they are committed to ending appropriate behaviors. When a country’s leadership is committed to ending corruption, they will do anything in their capacity to achieve this objective.
Anti-corruption commissions: Anti-corruption commissions are formed with the objective of creating an independent body to investigate and prosecute companies and government officials involved in corruption. According to Transparency International (2017), an anti-corruption agency that is independent and well financed can play a vital role in fighting corruption.
Unfortunately, anti-corruption commissions still face the threat of political influence and will only be effective if their permanence is legally guaranteed and independence of the commission is assured through the appointment of leaders who are competent, have an apolitical stance and demonstrate impartiality, independence, neutrality, and integrity (Transparency International, 2017).
Self-regulation: This approach to corruption is informal and mostly aims at promoting self-governance among businesses to end corruption. Such may be achieved through internal policies and codes of conduct. This approach is more about promoting moral duty among organizations by calling on organizations to be more responsible in their business dealings.
9. Conclusion
Corruption in international business has mostly been associated with barriers to market entry in international markets. As a result, organizations seeking entry into such markets may be forced to bribe foreign officials to facilitate their entry and circumvent the regulations.
Once an entry is achieved, there are market dynamics that often make it difficult for foreign companies to operate including business laws and regulations, foreign business taxation policies, business marketing practices, sales and distribution, and competition dynamics among other factors. These limit foreign business operations and expansion, and consequently influence the perpetration of corruption, to ease business in foreign countries and speed up business growth.
Despite the increasing efforts towards fighting corruption, it remains a great menace that may hinder international business for a long time. In this paper, the history of corruption in international business, economic impact of corruption, legal and political systems and different anti-corruption strategies that have been utilized over the years are discussed. This paper also establishes various solutions that may eventually cure corruption including internationalization, leadership and political will, anti-corruption commissions and self-regulation of international firms.
10. References
Ala’i, P. (2017). Controlling corruption in international business: the international legal framework. International Sustainable Development Law – Vol. II. Retrieved from https://www.eolss.net/Sample-Chapters/C13/E6-67-03-07.pdf
Eicher, S. (2012). Corruption in International Business: The Challenge of Cultural and Legal Diversity. Farnham, UK: Gower Publishing, Ltd.
Hauser, C., & Hogenacker, J. (2014). Do Firms Proactively Take Measures to Prevent
Corruption in Their International Operations?. European Management Review, 11(3/4), 223-237. doi:10.1111/emre.12035. Retrieved from web.b.ebscohost.com/ehost/pdfviewer/pdfviewer?vid=0&sid=4d18121e-f6b7-4cfd-98a2-91ab92914251%40sessionmgr120
Makhlouf, H. H. (2016). Corruption in the International Business Environment. The Journal of Human Resource and Adult Learning, 12(1), 32-39.
PBS (2017). Spotlight: History of the FCPA How a tough U.S. anti-bribery law came to pass. Retrieved from www.pbs.org/frontlineworld/stories/bribe/2009/02/history-of-the-fcpa.html
Rotberg, R. I. (2017). The Corruption Cure: How Citizens and Leaders Can Combat Graft. Princeton: Princeton University Press
SEC. (2012). A Resource Guide to the FCPA U.S. Foreign Corrupt Practices Act. Retrieved from https://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf
Thede, S. & Gustafson, N. (2012). International trade and the role of corruption. Retrieved from www.etsg.org/ETSG2009/papers/thede.pdf
UK Anticorruption Forum. (2017). Anti-Corruption Conventions & Instruments. Retrieved from www.anticorruptionforum.org.uk/acf/resources/instruments/
