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Keywords:

  • business-government relations;
  • corporate political strategy;
  • corruption;
  • rent-seeking

abstract

  1. Top of page
  2. INTRODUCTION
  3. GOVERNMENT CORRUPTION: CONCEPTUAL FOUNDATIONS
  4. UNDERSTANDING GOVERNMENT CORRUPTION: CONTRIBUTIONS FROM THE MANAGEMENT LITERATURE
  5. TOWARDS AN INTEGRATIVE MODEL OF FIRM RESPONSES TO CORRUPTION
  6. FUTURE RESEARCH ON CORRUPTION
  7. CONCLUSION
  8. ACKNOWLEDGMENTS
  9. REFERENCES

What is the relationship between government corruption and firm performance? To address this question, I conduct a review of articles published in the leading management journals on government-business interactions pertaining to rent-seeking activities and integrate findings from the fields of international business, social issues in management, public organization, institutional change, and corporate political activity. I find that while much empirical work corroborates the earlier findings suggesting a corrosive impact of government corruption on firm performance in general, management research also points to the heterogeneous impact of government corruption on individual firm performance, driven by the strategic activities conducted by firms in response to corruption. I propose an integrative model of firm strategy vis-à-vis corruption that predicts the activity choice of the firm as predicated by its organizational structure, political resources, industry regulation, and surrounding political and social institutions.


INTRODUCTION

  1. Top of page
  2. INTRODUCTION
  3. GOVERNMENT CORRUPTION: CONCEPTUAL FOUNDATIONS
  4. UNDERSTANDING GOVERNMENT CORRUPTION: CONTRIBUTIONS FROM THE MANAGEMENT LITERATURE
  5. TOWARDS AN INTEGRATIVE MODEL OF FIRM RESPONSES TO CORRUPTION
  6. FUTURE RESEARCH ON CORRUPTION
  7. CONCLUSION
  8. ACKNOWLEDGMENTS
  9. REFERENCES

Close to two decades of corruption research points to a strong theoretical and empirical consensus supporting the conventional wisdom that government corruption has negative consequences on business and economic development (Knack and Keefer, 1995; Mauro, 1995; Shleifer and Vishny, 1993). The debilitating effect of government corruption on firm performance is not solely due to the additional costs incurred through the money demanded by crooked government officials, but it is more due to corruption's inherent illegality and secrecy which promotes market distortions and unpredictability that penalizes firms to a greater extent than a simple increase in the tax rates (Campos et al., 1999; Fisman and Svensson, 2007; Shleifer and Vishny, 1993). Government corruption has been demonstrated to lower foreign investment (Globerman and Shapiro, 2003; Wei, 2000), increase risks and uncertainty (Getz and Volkema, 2001), and is said to be the reason why developing countries fail to converge in income with their developed country counterparts (Knack, 1996; Knack and Keefer, 1995).

Despite the considerable amount of evidence supporting this view, recent developments in the global economy compel a reassessment. The world has been witnessing the increasing economic performance of many emerging market economies, such as Brazil, Russia, India, and China in recent years (Blackburn and Forgues-Puccio, 2009; Lorenzen and Mudambi, 2010), despite limited improvements in the political institutions of these countries. The growing prominence of these emerging market economies is paralleled by the rise of world-beating multinational firms, such as Embraer, Cemex, Lenovo, and Infosys, from developing countries (Bonaglia et al., 2007; Luo and Tung, 2007; Ramamurti and Singh, 2009), indicating that firms can actually prosper despite – or perhaps because of – institutional deficiencies in their home countries (Cuervo-Cazurra and Genc, 2008; Peng et al., 2008).

Moreover, the recession of 2008 revealed the extent to which government regulations have been captured by powerful business interests even in developed countries (Dorn, 2010; Prosperetti, 2009). The international prevalence of corruption, coupled with continued globalization, increases the likelihood that firms will encounter government rent-seeking, leading scholars to declare that the ability to deal with corrupt practices is an important capability for firms to possess (Kwok and Tadesse, 2006; Oliver and Holzinger, 2008; Uhlenbruck et al., 2006). These developments imply that corruption within state institutions is not uniform in its attributes and is potentially asymmetric in its consequences on firm performance.

What explains the heterogeneous impact of corruption on firm strategy and performance? Most prior studies on corruption tended to focus on national attributes, such as historic antecedents, political structures, or cultural traits, to explain the differences in the prevalence of corruption in each country (Husted, 1999; La Porta et al., 1999). Subsequent articles point to the political structures that shape the collusiveness, arbitrariness, pervasiveness, and organization of government corruption, which in turn determine the extent of corruption's negative influence on the economy (Blackburn and Forgues-Puccio, 2009; Foellmi and Oechslin, 2007; Rodriguez et al., 2005). Yet, few studies have considered the role of the private sector in exploiting opportunities presented by corruption (Hellman et al., 2003; You and Khagram, 2005).

This paper reviews recent articles published in leading management journals on government–business interaction in search of studies analysing firm responses to government corruption. To the best of my knowledge, this paper provides the first review of the management literature on the topic of government corruption. Prior reviews in related domains have focused on other aspects of business–government interaction, such as corporate political strategy (Hillman et al., 2004; Shaffer, 1995), international business (Boddewyn and Brewer, 1994; Jackson and Deeg, 2008), multinational activity (Boddewyn, 1988), management of organizations (Pearce et al., 2009), public administration (Boyne, 2002), and ethics (Mantere et al., 2009). Despite the increased scholarship, management theorists still frequently overlook the role of governments and the regulatory environment on firm behaviour (Ring et al., 2005), which may be a reflection of an oft-repeated assertion that management research exerts ‘almost no influence on public policy and public sector management’ (Rynes and Shapiro, 2005, p. 926; emphasis in original). The global debate on the archetypal relationship between government and business remains dominated by academics situated in the legal and economic frames (Hambrick, 1994). Throughout this paper, I assert that management theorists can contribute strongly to this discussion by offering a unique perspective on national governance issues through a focus on human behaviour in complex organizations.

In particular, I find that through management science's focus on firms as the centre of analysis, our understanding of the impact of corruption on economic development becomes equally motivated by both the extent of government corruption and the reaction of firms to the political environment. Although much cross-country empirical work in management validates previous findings on the negative impact of government corruption on firm performance, more recent research points to the heterogeneous impact of government corruption on individual firm performance as influenced by the characteristics, capabilities, and motivations of said firms. For example, corporate political strategy investigates how firms strategize to exploit political markets; work in social issues in management has detailed how organizational values affect firm involvement in corruption; and international business has analysed how corruption influences firm investment decisions; among other research questions. Yet, as these research streams have not been fully integrated, the main question on how to manage firms in the presence of government corruption remains unanswered (Rodriguez et al., 2006).

Based on the review, I generate an integrative model of firm strategy in the presence of government corruption. This model and its subsequent propositions highlight the three main contributions of the management literature to the study of corruption that have been overlooked in other discussions: (1) that firms actively contribute to promoting or resisting government corruption; (2) that the heterogeneity of industrial contexts and firm capabilities leads to differing strategic responses to government corruption, allowing certain firms to exploit the advantages brought about by corruption; and (3) that firm strategic reactions are moderated by the internal corporate culture and the external social and political institutions where firms operate. Put simply, the model emphasizes that not all firms suffer by being embedded in an institutional environment with entrenched corruption because some of them have the capability and the motivation to make these political deficiencies work in their favour.

I conduct this review by first summarizing the conceptual foundations utilized in the literature to analyse government corruption and firm performance. I review articles published in the nine leading management journals from 1996 to 2008 and summarize the findings from the different research strands, such as public organization, international business, and corporate political strategy, which have looked at the different aspects of firm–government rent-seeking interactions. I conclude by presenting an integrative model of firm strategy vis-à-vis corruption containing research propositions that suggest new directions for bringing the literature forward.

GOVERNMENT CORRUPTION: CONCEPTUAL FOUNDATIONS

  1. Top of page
  2. INTRODUCTION
  3. GOVERNMENT CORRUPTION: CONCEPTUAL FOUNDATIONS
  4. UNDERSTANDING GOVERNMENT CORRUPTION: CONTRIBUTIONS FROM THE MANAGEMENT LITERATURE
  5. TOWARDS AN INTEGRATIVE MODEL OF FIRM RESPONSES TO CORRUPTION
  6. FUTURE RESEARCH ON CORRUPTION
  7. CONCLUSION
  8. ACKNOWLEDGMENTS
  9. REFERENCES

Government corruption or rent-seeking is generally defined as the sale of government property by government officials for personal gain (Shleifer and Vishny, 1993). This broad definition of corruption underscores the intention of government officials to give some advantage to particular entities inconsistent with their official duties without distinguishing between illegal methods, such as bribes and kickback payments, versus legal methods of influence peddling (Collins et al., 2009). Government corruption can be characterized as half of a dichotomous understanding of government intervention on firm activity. Government interventions have been characterized as being rent-seeking, as providing restrictions to private sector activity to generate excess returns for privileged firms and officials; or as being market-making, as playing an enabling function to facilitate interactions between economic actors by formalizing market practices (Fligstein and Stone Sweet, 2002; Schneiberg and Bartley, 2008).

Rational Arguments Explaining Corruption

Certain theoretical models explaining the presence of government corruption proceed utilizing rational argumentations, highlighting how rational actors weigh the benefits versus the costs of engaging in corrupt acts (Rose-Ackerman, 1978). Among the earlier theories are those pertaining to public choice, which criticized the traditionally held assumption that governments enact public policies to protect public interests (Lenway and Murtha, 1994; Stigler, 1971) by demonstrating how regulatory practices result from the political contestations by which individual interests are reconciled through trade and exchange (Buchanan and Tullock, 1962; Nelson and Winter, 1982) and how powerful interest groups, such as large business entities, have distinct advantages in attaining preferential regulation (Peltzman, 1976; Stigler, 1971). These public choice theories are supplemented by institutional economics, which highlights the moderating role of political institutions, such as electoral competition, decentralized political rights, and legal procedures, in enabling or preventing the potential for such rent-seeking (Treisman, 2000). Government corruption is both a manifestation and cause of a weak institutional environment (Shleifer and Vishny, 1993) which leads to increased transaction costs and diminished market formation (North, 1990; Williamson, 1991).

Social Arguments Explaining Corruption

Social accounts are also used to explain the prevalence of corruption in each society, pointing to the power of social norms in preventing (Fisman and Miguel, 2007) or facilitating the rationalization of corrupt activities (Anand et al., 2004; Collins et al., 2009; Miller, 2006). As such, the quality of state government in each society becomes embedded within the social, geographic, historical, and cultural context of each country (Husted, 1999; La Porta et al., 1999; You and Khagram, 2005). Sociology-driven institutional theories describe public policy as the codification of widely held norms and beliefs, with firms looking to government regulation as a source of normative or cognitive guidance that provides legitimacy for different firm activities (Edelman and Suchman, 1997; Scott, 2001). Apart from social norms, these social theories emphasize the power of social networks embedded between businessmen and government officials that are utilized by firms to achieve preferential regulatory treatment (Burt, 1997; Granovetter, 1985; Uzzi, 1997); as well as resource dependence where entities possessing scarce,highly demanded resources are those who are most able to extract political concessions (Pfeffer and Salancik, 1978).

Corruption Outcomes

Many early studies state that minimal corruption may be beneficial for economic development by ‘greasing the wheels’ and facilitating transactions hampered by bureaucratic delay, by providing incentives for government officials to work harder (Huntington, 1968; Leff, 1964) and by allocating government services based on firms' willingness to pay (Azfar et al., 2001; Lui, 1985). However, this stream of theoretization has found limited support. The main problem with this ‘grease the wheels’ theory of corruption is that government officials usually have discretionary power over red tape and can customize it to extract additional rents (Kaufmann and Wei, 1999; Shleifer and Vishny, 1993).

A majority of scholars now argue that government corruption acts more like ‘sand in the wheels’ that hampers the overall performance of the economy (Klitgaard, 1991; Rose-Ackerman, 1978). Beginning with the seminal study by Mauro (1995), academics have found much empirical evidence indicating how state corruption negatively affects national economic outcomes. Corruption imposes additional costs to both investors and consumers (Wei, 2000), promotes much unpredictability and economic distortion (Campos et al., 1999; Fisman and Svensson, 2007; Shleifer and Vishny, 1993), and obstructs many other commercial outcomes, such as access to credit (Djankov et al., 2007) and the effectiveness of corporate governance (La Porta et al., 2000).

However, the presence of economically-vibrant countries with high levels of corruption, such as China, Brazil, and India has demanded a revisiting of this finding. The general explanation is that government corruption is heterogeneous in nature and thus heterogeneous in outcome. For example, some authors distinguish whether bureaucrats organize corrupt activities in cooperation with one another and whether public officials pursue their illegal profiteering in collusion with private agents, stating that organized and collusive corruption is the least insidious form of corruption (Blackburn and Forgues-Puccio, 2009; Foellmi and Oechslin, 2007). Another argument states that the grease-the-wheel versus sand-in-the-wheel characterization of corruption is contingent on the strength of the main government institutions, where corruption improves production efficiency only in very poorly governed countries (Méon and Weill, 2010).

Nonetheless, these studies tend to focus on corruption at the industry or the national level, taking individual firm-level influence as given (Hellman et al., 2003; You and Khagram, 2005). This level of analysis glosses over the fact that individual firms that cultivate political ties or engage in bribery may increase their own output and productivity, compared with their less corrupt peers (Peng and Luo, 2000; Vial and Hanoteau, 2010). The diverse impact of corruption at the level of the firm provokes outcomes wherein certain firms thrive even when the corrupt practices are detrimental to the economy at large. It is important to understand the reaction of different firms vis-à-vis government corruption in order to have a more thorough understanding of its impact on the long-term economic development of each country.

UNDERSTANDING GOVERNMENT CORRUPTION: CONTRIBUTIONS FROM THE MANAGEMENT LITERATURE

  1. Top of page
  2. INTRODUCTION
  3. GOVERNMENT CORRUPTION: CONCEPTUAL FOUNDATIONS
  4. UNDERSTANDING GOVERNMENT CORRUPTION: CONTRIBUTIONS FROM THE MANAGEMENT LITERATURE
  5. TOWARDS AN INTEGRATIVE MODEL OF FIRM RESPONSES TO CORRUPTION
  6. FUTURE RESEARCH ON CORRUPTION
  7. CONCLUSION
  8. ACKNOWLEDGMENTS
  9. REFERENCES

Scope and Methods

As a starting point for this analysis, I reviewed the articles published in the leading management journals, given how the greatest impact on the academic profession arguably comes from the highest quality journals (Bruton and Lau, 2008). A major question in conducting this type of review is which journals constitute an appropriate sampling frame. My initial selection drew from the list of the top 20 journals as ranked by their citation impact factors, calculated by the Social Science Citation Index for the field of management for the year 2008. Given the scope of the review, I eliminated journals that were focused on management sub-fields that had relatively limited interface with government corruption, such as journals on information systems, operations, marketing, education, and organizational behaviour. The final list of nine journals included for this study were: Administrative Science Quarterly, Academy of Management Journal, Academy of Management Review, Journal of International Business Studies, Journal of Management, Journal of Management Studies, Management Science, Organization Science, and Strategic Management Journal. The resultant list of journals conforms content-wise to previous reviews (e.g. Armstrong and Shimizu, 2007; Hitt et al., 2006; Roth and Kostova, 2003), even if the subject matter is different, providing some basis for comparison. Subsequently, I chose the period 1996 to 2008, as 1996 was the year that followed the publication of the two classic empirical studies on government corruption, namely Mauro (1995) and Knack and Keefer (1995). Table I presents the list of journals and their impact factors.

Table I.  Government-related articles published in the leading management journals by year
JournalImpact factor (2008)1996199719981999200020012002200320042005200620072008Journal total
  1. Note: The Academy of Management Journal eliminated research notes as a separate category of articles in 2005. To ascertain the impact of this editorial change, the 13 AMJ research notes tackling government-related issues prior to 2005 were analysed separately. The inclusion of these articles did not materially affect the results of this article and were dropped for the sake of uniformity.

Academy of Management Journal6.082315162721575763
Academy of Management Review6.13211410353210510965
Administrative Science Quarterly2.85413235122312130
Journal of International Business Studies2.993466813711714151624134
Journal of Management3.08 22113223514430
Journal of Management Studies2.5632741188141313171210122
Management Science2.353333434245551054
Organization Science2.58332322438175346
Strategic Management Journal3.343524698712812101298
Annual total 23242732614846465264706980642

Although the management literature has conducted a substantial number of studies on government corruption, I wanted to draw upon the broader pool of business–government interaction studies to piece together the disparate contributions of the literature to the topic. To do this, I reviewed all published articles that incorporated the government in the analysis, from studies that centred on the government–firm interaction itself to those that included the government as only one of numerous factors to be investigated. I conducted a manual search through all the journals included in the sampling frame, supplemented by an automated keyword search on the ISI Web of Knowledge for articles containing any of the words ‘government’, ‘regulation’, ‘corruption’, ‘regulatory’, ‘political’, or ‘politics’ in the topic field. The process generated a total of 642 journal articles, excluding editorials, commentaries, research notes, and book reviews.

I reviewed each of the papers and tabulated their key aspects to find particular trends in publication volumes. Among the coded information were journal, year, general field, theoretical background, geographic focus, and methodology. Also in Table I, I present the number of articles analysed based on the journal and year they were published. This table demonstrates an increase in the number of articles about the government over the sampling period. It shows that the largest number of government-related articles was published in the Journal of International Business Studies due to the salience of the government in international issues.

Subsequently, I reviewed the overall findings of these papers by assessing the embedded assumptions, following the rent-seeking versus market-making dichotomy utilized by previous authors (Fligstein and Stone Sweet, 2002; Schneiberg and Bartley, 2008). As stated earlier, this distinction characterizes government intervention on firm activity as either rent-seeking, as restricting activity to generate excess returns for privileged firms and public officials; or market-making, as facilitating interactions between economic actors by formalizing market practices. I categorized the articles in Table II based on the embedded assumptions used in the analysis. Around 50 per cent percent of the articles studied maintain the assumption of the government as a rent-seeker, as compared to the 42 per cent of studies which advocate a market-making role for the government, a relatively surprising result given how within the social sciences, the government has traditionally been viewed as an autonomous entity operating for the benefit of the general public (Schneiberg and Bartley, 2008; Stigler, 1971).

Table II.  Number and percent of articles by type of government intervention
Government intervention1996199719981999200020012002200320042005200620072008Total
Rent seeking12131612362724262332362932318
Market making961115181719172228303842272
Not applicable250574337442652
Total23242732614846465264706980642
Percent of articles
Rent seeking52%54%59%38%59%56%52%57%44%50%51%42%40%50%
Market making39%25%41%47%30%35%41%37%42%44%43%55%53%42%

This result provides us with a final sample of 318 articles analysed for this study. I present additional trends in the literature culled from the analysis of the different articles. The United States remains the main subject of government rent-seeking studies with 70 papers dedicated to it; research on China is a strong second place, with 44 papers, followed by the United Kingdom (13) and Japan (8). Comparative multi-country studies are also a staple in the field with 83 studies, 30 of which have only emerging markets as their focus. In terms of the theories utilized in the sampled papers, public choice and new institutional economics were the most widely used by the different authors with 39 manuscripts each; other popular theories include neoclassical economics (36), stakeholder theory (29), public ownership (23), and new institutionalism (21). With regard to research methodology, close to two-thirds of the studies were quantitative in nature, 14 per cent were case studies, and the rest were theoretical or analytical papers.

Finally, I find that most of these papers fall under five general management fields. The predominant field among the papers sampled was international business with 89 articles dedicated to it, followed by institutional change (77), corporate political strategy (50), public organization (43), and social issues in management (41). I summarize the findings from each of these fields separately in the subsequent sections before providing an overall synthesis of the implications of these findings.

Corruption and International Business

With its focus on how cross-country institutional differences affect the performance of firms, international business (IB) research plays a valuable role in investigating the corruption–business interface. Unlike the research in economics which centres on the economy-wide impact of corruption, the main contribution of IB research to corruption studies is its emphasis on the effect of government corruption on the average firm (e.g. Delios and Henisz, 2003b; Doh et al., 2003). Government corruption has been shown to encourage oligarchic control (Fogel, 2006), lead to a greater use of bank loans (Straub, 2008), slow down technology absorption (Henisz and Macher, 2004; Zhu et al., 2006), and lower stock market valuations (Miller et al., 2008; Weitzel and Berns, 2006). Poor state governance also leads to greater state ownership (Doh et al., 2004), limited trust among employees (Child and Moellering, 2003), and lower international diversification (Wan, 2005). These studies emphasize some common strategic responses that firms utilize as a reaction to government corruption, such as the greater use of non-market versus market strategies (Wan, 2005), or the increased reliance on informal network ties to substitute for formal networks (Peng and Heath, 1996; Peng et al., 2008).

A majority of the corruption studies centres on the entry decision of Western multinationals into foreign markets (e.g. Globerman and Shapiro, 2003; Henisz and Delios, 2001). Multinational firms are more hesitant to invest in countries with high levels of corruption (Habib and Zurawicki, 2002), requiring greater experience in dealing with corrupt practices (Gaur and Lu, 2007; Henisz and Macher, 2004) and boards with more outsiders in order to ensure oversight (Ellstrand et al., 2002). Apart from the decision to invest, substantial levels of corruption affect the mode of entry of firms, promoting non-equity entry modes and joint ventures, instead of wholly-owned subsidiaries (Chan and Makino, 2007; Rodriguez et al., 2005; Uhlenbruck et al., 2006), which reduces the likelihood of survival of these newly-formed firms (Gaur and Lu, 2007).

International business research offers institutional-level explanations to describe the diverse consequences of corruption based on the differences in the type of government corruption in each country. Authors describe corruption as having two characteristics: pervasiveness or the prevalence of bribery across government transactions; and arbitrariness or the ambiguity of obtaining the agreed upon special treatment from the payment of bribes, with arbitrariness having the more detrimental effect on the economy (Campos et al., 1999; Rodriguez et al., 2005). However, this relationship may not necessarily hold constant for all types of countries; for example, in transition economies where political uncertainty is prevalent, studies indicate that foreign investors prefer to deal with the additional uncertainty of arbitrary corruption, rather than the certainty of pervasive corruption (Cuervo-Cazurra, 2008a).

More recently, some international business studies reveal that government corruption promotes positive outcomes for certain firms. Recent papers demonstrate that home market corruption provides advantages for companies which are able to utilize their experiences in dealing with government corruption to their advantage and successfully penetrate markets with similarly corrupt institutions (Cuervo-Cazurra, 2006; Cuervo-Cazurra and Genc, 2008; García-Canal and Guillén, 2008). These political deficiencies can be used to provide well-connected firms with preferential access to subsidized capital, protected markets, and raw materials, providing firms with the ability to exploit opportunities abroad with no requirements for generating short-term returns for banks and other private stakeholders (Aggarwal and Agmon, 1990; Buckley et al., 2007).

Corruption and Institutional Change

Studies from institutionalization and regulatory compliance, which deal with how industries change in response to regulatory shifts, emphasize how government corruption does not always come from public policy crafted by rent-seeking politicians, but instead underscore the fact that many government policies inadvertently promote industry inefficiencies (King and Lenox, 2000), given how they constrain firm strategies and limit managerial discretion (Kim and Prescott, 2005; Peteraf and Reed, 2007). If public policy is crafted by heterogeneous regulatory stakeholders whose competing interests lead to different regulatory outcomes (Kassinis and Vafeas, 2006), the government's ability to enforce compliance is indirect and disorderly, proceeding via the interaction among the different industry stakeholders (Buysse and Verbeke, 2003; Stevens et al., 2005). Proper regulatory measures should contain sufficient flexibility to grant firms latitude in meeting stated goals (Majumdar and Marcus, 2001), facilitate monitoring for compliance (Levi and Nault, 2004), and provide governments with stronger bargaining power (Globerman and Shapiro, 1999) to avoid corrupt outcomes.

Given the negative impact of poorly constructed public policy, management studies explore different mechanisms by which industries can extricate themselves from the effects of poor government policy. The answer is not as straightforward as the mere elimination of bad government policy, since deregulation does not diminish corruption automatically, given how government extortion can merely shift from public hands to private ones (Lambsdorff, 2005). Around 30 articles in my sample looked at the elimination of government control via deregulation and privatization on a diverse set of industries such as US trucking (Silverman et al., 1997), Japanese beer (Craig, 1996), or Eastern European state-owned firms (Uhlenbruck and De Castro, 2000), and they find that the beneficial aspects of deregulation and privatization are dependent on the strategic choices made by firms in the affected industries to overcome government legacy costs (Andrews and Dowling, 1998; Uhlenbruck and De Castro, 1998).

These studies prescribe firm activities that can be done to avoid the negative impact of poor public policy. Recent studies have proposed the creation of self-regulating industry associations that move the regulatory decision-making from the hands of the government to the industry and its other stakeholders (King and Lenox, 2000; Lenox, 2006; Teegen et al., 2004). Another possibility is the formation of business groups through increased horizontal and vertical integration which internalizes inter-firm processes, allowing firms to create organizational substitutes for government and other institutional imperfections (Hoskisson et al., 2005; Khanna and Rivkin, 2001; Yiu et al., 2007). Alternatively, industries can work more closely with government officials in the creation of public policies to enable the development of the innovative commercial practices (Faerman et al., 2001; Tihanyi and Hegarty, 2007). In extreme cases, firms that successfully obtain a deep embeddedness within the existing political regime may slowly morph into institutions themselves, co-shaping industry regulations with the government and blurring the distinction between corporations and political institutions (Dieleman and Sachs, 2008).

Corruption and Corporate Political Strategy

Corporate political strategy's main contribution to the analysis of government corruption is predicated upon the active participation of firms in the process of government regulation and its emphasis on the heterogeneity of individual firm responses that allow certain firms to exploit the potential advantages brought about by corruption. The increasing importance of corporate political strategy as a field of research is reflected by the growing number of theoretical papers published in recent years (e.g. Capron and Chatain, 2008; Holburn and Bergh, 2008; McWilliams et al., 2002).

Studies from corporate political strategy have analysed which firms are most motivated to influence law-making, obtain preferential access to government-controlled resources, and circumvent stringent bureaucratic practices (Hillman and Hitt, 1999; Peng and Heath, 1996). These studies verify that firms whose industrial contexts provide the most gains from corruption, such as those in heavily regulated industries (Hillman, 2005; Hillman and Hitt, 1999) or those reliant on government contracts (Schuler et al., 2002), have the strongest motivation to influence political outcomes.

For political strategies to work, the motivation for firms to involve themselves in rent-seeking activity requires firm capabilities to influence policy. Corporate political strategy has isolated the different firm resources that translate to advantageous political capital, with studies utilizing economic theories that stress economic resources, such as revenues (Schuler et al., 2002), investment projects (Delios and Henisz, 2003a; Vaaler, 2008), or export potential (Clougherty, 2004); while studies using social frames focus on the social linkages between firms and governments (Frynas et al., 2006; Hillman, 2005; Li and Atuahene-Gima, 2001).

Corporate political strategy papers investigate the multi-dimensional process of how firms exploit regulatory processes. Authors have progressed from merely stressing the performance-enhancing potential of having contacts with people in power (Hillman et al., 1999) into investigating the details of which informational, financial, and constituency-building activities for which types of government contacts provide which benefits to which types of firms. For example, long-serving but recently-departing cabinet members were shown to be more likely to be appointed as board members as compared to legislators (Lester et al., 2008) with firms from heavily-regulated industries benefiting more from having politician-board members (Hillman, 2005). Political ties have been shown to improve certain outcomes, such as sales growth and competitive positioning, but not profit growth or efficiency (Park and Luo, 2001).

The literature stresses that activities that permit firms to take advantage of government corruption are not always a beneficial resource (Coleman, 1990). Authors highlight the need for firms to cultivate political resources to take advantage of underdeveloped institutions but to also remain cognizant of the risks generated by regime changes (Cuervo-Cazurra et al., 2007; Frynas et al., 2006), especially the possibility of retaliation by the new regime (Siegel, 2007).

Most management research on political strategy remains focused on the short-term profit potential generated by regulatory capture, despite the fact that firms privately gain from the positive improvements in government policy (Boddewyn, 2009; Mantere et al., 2009). The corporate political strategy literature would benefit from additional research that deals with the profound influence of firms on enhancing state governance, to add to the handful of studies demonstrating how multinational corporation pressure can lead to lower incidences of corruption (Kwok and Tadesse, 2006) or the improvement of environmental standards (Child and Tsai, 2005). Reducing corruption within the sphere of the political strategy literature requires an analysis of different strategic tools, given how private gains from public policy improvements are generally dispersed across many social actors, magnifying issues of free-riding and collective action.

Corruption and Public Organization

The main contribution of public organization studies to corruption research is through its clarification of how differences in organizational structure in the public sector versus the private sector promote corruption and inefficiency. Public sector organizations are distinguishable from their private counterparts because they are owned collectively by political communities instead of shareholders, funded by taxation rather than fees paid by clients and controlled by political forces more than markets (Niskanen, 1971; Walmsley and Zald, 1973). Such differences have led to state enterprises that are generally more bureaucratically complex; more affected by external events; less subject to competition pressures; more concerned with multiple, contrasting objectives; and more constrained by limited funding (Boyne, 2002; Rainey et al., 1976). These organizations are found to be less efficient than their private counterparts (Darnall and Edwards, 2006; Goldeng et al., 2008).

This tendency of state-owned enterprises to be prone to bureaucratic inefficiencies and corrupt practices has spawned theories such as new public management that seek to use private sector management for improving public sector functions (Ferlie et al., 1996), or even their conversion into private enterprises. However, this notion of private organizational superiority over their public counterparts has come under question. State ownership of firms, which internalizes the relationship of government and business can function as an institutional alternative to regulation (Thomsen and Pedersen, 2000), especially in countries like China where state-owned enterprises have been shown to display better performance than their private counterparts (Peng et al., 2004; Ralston et al., 2006), so long as there is sufficient external competition and appropriate organizational control structures (Lin and Germain, 2003). Recent studies argue that public sector practices, such as expansive bureaucracies, limited decision-making among managers, and fixed salary schemes, may sometimes provide more appropriate incentives for corporate governance, as opposed to share price- or profit-driven bonuses used in private companies which promote short-termism and excessive risk-taking (Benz and Frey, 2007).

Corruption and Social Issues in Management

The final set of papers investigates issues pertaining to social issues in management including topics such as business ethics and corporate social responsibility. Business ethics studies contribute to the analysis of corruption by focusing on how characteristics internal to the firm, such as managerial beliefs, ownership, organizational structure, and personal relationships, impact the firm's ethical evaluation of its activities (e.g. Shaffer and Hillman, 2000; Spicer et al., 2004). These articles isolate different personal and organizational factors such as educational levels, materialism, family strength, and high humane orientation that facilitate managerial rationalization on whether to engage in corrupt activity (Cullen et al., 2004; Martin et al., 2007). These papers add the insight that each firm's decision to comply with or violate government regulations is subjective, grounded on management's understanding of what constitutes the firm's commercial interests (Sharratt et al., 2007).

These studies stress the interplay between external social norms and the internal organizational culture that promotes or constrains ethical behaviour among the firm's employees (Wade-Benzoni et al., 2002; Zahra et al., 2005). Studies indicate that the legitimacy of corporate governance structures is influenced by the cultural outlook and legal environment of a country (Judge et al., 2008), whereas the influence of external stakeholders is also moderated by how the firm's organizational and ownership structures prioritize their claims (Delmas and Toffel, 2008; Laplume et al., 2008).

On the other hand, studies focused on corporate social responsibility provide alternative options for firms in dealing with corrupt government officials. Corporate social activities can be used as a strategy for garnering publicity and co-opting influential stakeholders with the final aim of influencing political decision-makers and reducing the risk of regulatory interference (Bansal and Roth, 2000; Brammer and Millington, 2004; Child and Tsai, 2005).

Corruption Research in Other Fields

The rest of the government corruption studies in the sample cover a diverse set of fields such as organizational behaviour, entrepreneurship, taxation, or managerial behaviour. In the field of entrepreneurship, studies show that political resources and entrepreneur personality traits are important drivers for ensuring the success of entrepreneurial ventures in countries with much political instability (Li and Zhang, 2007; Luthans and Ibrayeva, 2006). In terms of managerial behaviour, authors have found that cultural norms and environmental familiarity weaken the impact of political uncertainty on the impact of managerial decision-making and decision effectiveness, as managers find mechanisms to discount political risks (Elbenna and Child, 2007). For human resources, political risks, state ownership, and regulatory differences make it difficult to implement strategic human resources practices, even if their implementation promotes firm efficiency (Walsh, 1996; Wei and Lau, 2008). Although the limited number of studies included in the sample makes it difficult to generate firmer conclusions regarding the relationship between corruption and firm performance, they offer new avenues for future research.

Review Summary

The review above displays the broad innovative work that has been conducted in the management literature analysing the interaction between government corruption and firm behaviour. Within each section, I mention specific questions that require further study within each management field, such as the concept of corruption minimization in corporate political strategy, and the organizational advantages of public organizations. Similarly, I find that there have been few studies incorporating government corruption in other management fields, such as organizational behaviour and entrepreneurship.

These articles provide a deep nuance to the oft-repeated conclusion that government corruption has a negative impact on firms, by providing several insights as to how certain companies are able to thrive despite the existence of government corruption in their midst. Each of these management fields provides different insights as to how firms react to corruption because each field of research focuses on a different level of analysis in the business–government relationship; with international business focused on institutions, institutionalization assessing industry dynamics, comparative political strategy looking at firm strategy, public organizations examining organizational structure, and social issues in management concentrating on corporate culture. In essence, these four levels of analysis provide the main building blocks for our understanding of firm responses to corruption. I summarize the findings from the previous analysis in Table III.

Table III.  Key perspectives on firm reactions to government corruption
 International businessInstitutional changeCorporate political strategyPublic organizationSocial issues in management
Theoretical foundationsInstitutional economics (North, 1990)Institutionalism (March and Olsen, 1989; Scott, 2001); social movement (Rao, 1998)Resource dependence (Pfeffer and Salancik, 1978); public choice (Buchanan and Tullock, 1962); social network theory (Granovetter, 1985)Neoclassical economics (Friedman, 1962); public organization (Niskanen, 1971)Stakeholder theory (Freeman, 1984)
Central research question pertaining to corruptionHow do differences in political institutions and national corruption levels affect firm behaviour?How are industries affected by regulatory changes?How do firms gain from government corruption?How does the organizational structure of public organizations impact efficiency?How do social norms and organizational culture influence corrupt behaviour among firms?
Level of analysisInstitutionsIndustry regulationsFirm strategyOrganizational structureOrganizational culture
General findingsCorruption has strong negative effects on local firm behaviour, leading to lower trust, valuation, technology absorption, among others. Corruption affects MNE entry decision and promotes joint ventures.Regulations can affect industries negatively by diminishing firm strategic options. The beneficial outcomes from regulatory changes are dependent on the strategic reaction of firms.Firms that operate in industries with high dependence on government are more motivated to influence public policy. Firms with more revenues, investment projects, experience and social ties are more capable of influencing public policy.Public organizations are different from private companies due to ownership, funding and control. They are generally less efficient than the private sector.Managerial beliefs, organizational structure, and personal relationships impact the firm's ethical evaluation of its activities and the probability that a firm will engage in corrupt activity.
Recent debatesDo different types of corruption promote different outcomes? What strategic advantages does corruption generate for firms?How should regulations be crafted to minimize negative impacts on industries?What methods do firms use to influence public policy in emerging markets? How do firms influence the reduction of corruption?Can public organizational practices be superior to private management?How do social norms and organizational culture interact to affect corrupt activity?
Strategic questionHow do firms cope with different types of corruption?How can firms act to minimize the negative impact of regulation on their performance?How do firms influence public policy?How can state-owned firms deal with corruption and bureaucratic inefficiency?How can corporate social responsibility translate to firm political strategy?
Firm activities in response to corruptionFirms may increase political networking and engage in more nonmarket strategies. MNEs limit investments into corrupt countries and rely on local partners.Firms can avoid regulation through self-regulation or the formation of business groups. Firms can work closely with government to co-create regulations.Firms may utilize lobbying, electoral contributions, bribes, networking, and other political methods to capture regulation or encourage institutional change.State-owned firms can internalize government–firm interactions and be efficient given competition and apt organizational structures.Firms may utilize corporate social responsibility projects to influence public policy.

Furthermore, I find areas where there are overarching gaps in the research that cut across all management fields. The body of corruption research suffers from the predominance of developed country studies, where most political processes operate in a predictable and transparent manner; but in fact, it is in emerging markets where corruption is more endemic and where firms have a stronger influence on the business–government relationship (Hoskisson et al., 2000; Pearce et al., 2008). Granted there have been a number of papers that look at countries such as Ghana (Acquaah, 2007), Egypt (Elbenna and Child, 2007), and South Korea (Siegel, 2007), but these papers remain relatively few in number, with China being the only emerging market in which a substantial amount of research has been conducted (e.g. Farh et al., 1998; Li and Zhang, 2007; Peng and Luo, 2000).

Second, most of the papers in the study focus on the empirical outcomes of government corruption or its antecedents. Very few studies (see Dieleman and Sachs, 2008; Levy and Egan, 2003; Shaffer and Hillman, 2000) have been conducted detailing the processes by which firms interact with corrupt governments either to minimize the impact of corruption on their operations or to extract private rents. Our limited understanding of the processes underlying business–government interaction is manifested by the dominance of empirical work conducted from surveys and archival datasets in comparison with the small amount of case studies.

Our understanding of the business–government interaction with respect to corruption remains incomplete because the divergent research conducted in each field centres solely on one or two levels of analysis of the subject matter. Most studies revolve around the impact of institutions on industries, or industries on firms, even as numerous aspects surrounding firm strategy do benefit from an analysis conducted at the level of firm, industry, and institution (Peng et al., 2008). The illegality of most forms of government corruption underscores the need to incorporate corporate culture into the analysis, given the ethical dimension inherent in a firm's reaction. I move the field towards a more comprehensive analysis of business–government corruption by integrating the disparate field-based analyses into a single model of firm response.

TOWARDS AN INTEGRATIVE MODEL OF FIRM RESPONSES TO CORRUPTION

  1. Top of page
  2. INTRODUCTION
  3. GOVERNMENT CORRUPTION: CONCEPTUAL FOUNDATIONS
  4. UNDERSTANDING GOVERNMENT CORRUPTION: CONTRIBUTIONS FROM THE MANAGEMENT LITERATURE
  5. TOWARDS AN INTEGRATIVE MODEL OF FIRM RESPONSES TO CORRUPTION
  6. FUTURE RESEARCH ON CORRUPTION
  7. CONCLUSION
  8. ACKNOWLEDGMENTS
  9. REFERENCES

The recent research detailed in the earlier section strongly emphasizes the fact that firms are not passive responders to government corruption, but instead are active contributors in abetting or resisting government corruption through their strategic activities. This heterogeneity of firm responses to government corruption profoundly influences the impact of government corruption on the performance of the firm itself, as well as on the economic well-being of each society.

I thus propose the creation of an integrative model of corruption that incorporates a multi-level framework centred on how firms react to corruption as driven by the characteristics of the firm, industry, and institutions. The model centres on firm political resources and industry regulatory dependence from the political strategy literature as the main drivers of firm strategy. To this, I incorporate the political and social institutions predominantly studied in both the international business and institutional change literatures, with the organizational structure and corporate culture prevalent in studies from the public organization and social issues in management fields, to understand their moderating roles in determining the choice of firm activity. Such a theoretical integration allows us to explore how firm political resources, industry regulatory dependence, political institutions, social norms, organizational structure, and corporate culture each play an important role in explaining the way firms react to government corrupt behaviour.

This analysis of the firm's strategic reaction to corruption builds on a framework first proposed by Austin (1990) for dealing with governments. Austin (1990) states that firms select from four main strategic approaches depending on the relative power of the firm and the relative importance of the regulatory issue. If the firm has considerable political resources and public policy strongly affects industry performance, then firms should attempt to alter the relevant public policy. If the firm has high political resources but regulation is of limited importance to industry operations, firms are best tasked to initiate a strategy to avoid the political issue. Ally strategies are best used when firms have limited political resources but public policy is integral to the industry's performance; whereas accede strategies are best used when the firm has limited political resources and political issues are of limited consequence. Austin's (1990) model is illustrated in Figure 1.

image

Figure 1. Strategic approaches to government relations. Source:Austin (1990).

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Many of the papers reviewed in this study provide empirical validation to the premise that firm reactions to corruption follow along the lines illustrated by the Austin model. Existing studies suggest that business–government interaction is driven primarily by the resources possessed by each firm and the political dependence of the industry in which the firm operates (Oliver and Holzinger, 2008). For example, previous findings demonstrate that firms with limited political resources are likely to generate alliances with powerful officials (Peng and Luo, 2000; Xin and Pearce, 1996) and with local firms via joint ventures (Brouthers and Brouthers, 2003). Other papers highlight the fact that hiring lobbyists to alter regulations is more often conducted by firms in highly regulated industries (Hillman, 2005; Hillman and Hitt, 1999; Schuler et al., 2002). These singular findings, however, remain disjointed, and as shown in this review, there have been few systematic studies providing a multi-level assessment as to how the interaction between firm resources and industry factors affects the choice of political strategy initiated by each firm (e.g. Hillman and Wan, 2005).

Proposition 1: Firm political strategy in response to government corruption is dependent on the firm's political resources and the dependence of its industry to public policy.

I paraphrase the Austin model to propose that each firm's strategic reaction to government corruption is driven by the firm's political resources and the regulatory dependence of the industry to public policy. However, the actual implementation of this strategy is moderated by the external institutions surrounding the firm and the internal organizational characteristics of the firm itself, as marked in the summary model presented as Figure 2.

image

Figure 2. Strategic approaches in dealing with government corruption

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I further extend the model utilizing Porter's (1991) distinction between the firm's strategy (which pertains to the desired goal of the firm) versus the firm's activities (which pertain to the actions which the firm undertakes to achieve said goal). I enumerate the different activities mentioned in the articles reviewed that are utilized by firms in dealing with corruption and classify these activities according to the firm's desired strategy. For example, firm activities such as the formation of business groups, creation of self-regulating industry groupings, or limiting investment in corrupt markets are all activities designed to avoid the negative impact of government corruption; on the other hand, lobbying to achieve regulatory capture or to lessen corruption in state governance can both be categorized as manifestations of the alter strategy. Political networking, creation of joint ventures with local firms, and corporate social responsibility for constituency buildings are all activities related to an ally strategy; while direct bribery and the acceptance of bureaucratic delays can be seen as parts of an accede strategy.

Certain strategic activities that firms conduct in reaction to government corruption provides benefits primarily to individual firms and may prove to have destructive economic consequences for the industry and the country's economy. For example, as part of an accede strategy, resorting to bribery provides private benefits through an improved procurement of government services for the firm; however, this bribe provides costs to non-bribe paying firms as bureaucrats are provided with incentives to withhold government services to extract additional rents. Similarly, in terms of an alter strategy, firm expenditure for capturing preferential regulation through networking allows firms to benefit primarily by extracting better treatment to the detriment of other economic stakeholders. Meanwhile, costly firm lobbying to diminish corruption among government offices may provide positive benefits to the firm but these benefits are diffused throughout the industry, making firms hesitant to invest in such an undertaking even if such an institutional improvement may promote the overall development of the economy.

It is this divergence between the private versus social benefits that dictates whether the reaction of firms to corruption alleviates or worsens the negative consequences of corruption to the economy. If the general firm reaction to corruption in a country includes activities that mostly generate social benefits rather than private benefits, then corruption may not be as malignant in impact as in other countries. On the other hand, if most firms react by conducting activities that primarily benefit themselves at the expense of other economic players, then the reaction worsens the impact of corruption.

The interplay between external political institutions and social norms with the internal organizational structure plays a vital contingent role in inducing individual firm reactions to corruption (Wade-Benzoni et al., 2002; Zahra et al., 2005) and in so doing, influences the overarching harmfulness of corruption on society. Although the cultural, legal, and social institutions in each country do not necessarily affect the choice of firm strategy, they restrict the availability of certain activities as plausible options for the firm (Cuervo-Cazurra, 2008b; Gardberg and Fombrun, 2006; Spicer et al., 2004). Political institutions discourage certain actions conducted by firms by increasing the private costs associated with socially harmful activities through legal penalties; while socio-cultural institutions operate by generating normative pressures that dictate the social illegitimacy of particular modes of behaviour.

To illustrate, in terms of an accede strategy, activities related to direct bribery may be more available to firms from certain countries because of a lower probability of lawful sanction or its greater cultural acceptability as a form of reciprocal gift-giving (Cuervo-Cazurra, 2008b; McCarthy and Puffer, 2008; Spicer et al., 2004). The cultural traditions and political structures in certain developing countries are said to be essential in encouraging companies to conduct ally strategies in the form of political networking, because of the increased benefits produced by these ties in facilitating economic exchange and diminishing regulatory risk (Acquaah, 2007; Peng and Luo, 2000). Similarly, the effectiveness of using corporate citizenship projects as an ally strategy is determined by how the country's socio-political institutions legitimize and interpret the firm's activities as being altruistic or self-serving (Gardberg and Fombrun, 2006).

Proposition 2: Firm political activity in response to government corruption is moderated by the political and socio-cultural institutions of the country where the firm operates.

In similar fashion, the firm's internal structure and the ethical values of its employees play a role in encouraging or preventing the use of certain options by firms (Cullen et al., 2004; Martin et al., 2007; Sharratt et al., 2007). In parallel with external institutions, the organizational structure of the firm maintains administrative rules that provide incentives and penalties for its employees, while intra-firm norms impose social sanctions that enforce employee behavioural compliance (Lange, 2008). Moreover, differences in each firm's corporate culture and structure determine the receptivity of individual managers to external pressures and thus influence the firm's decision on how to react to these perceived pressures (Delmas and Toffel, 2008).

For example, prior research points to board composition, organizational culture, and senior leadership as among the more influential factors affecting the individual employees' probability of engaging in illegal activities (Zahra et al., 2005). Studies indicate that firms ascribing to internal ethical codes were more likely to display assertiveness and less likely to utilize social networks when dealing with government corruption (Luo, 2006). The firm's corporate culture, ownership, organizational processes, and market orientation have also been shown to affect the ability of firms to effectively extract performance benefits from engaging in political networking, and hence its prevalence as an ally strategy (Li et al., 2008; Park and Luo, 2001).

Proposition 3: Firm political activity in response to government corruption is moderated by the organizational structure and corporate culture of the firm.

The model can be expanded to analyse which firms are able to prosper based on their reaction to corruption. As stylized examples, in countries like China and Russia, where strong centralized state governments limit the usefulness of political resources possessed by firms, successful firms are generally those that are able to properly execute the ally strategy, providing an alternative explanation as to why guanxi and blat networks allow well-connected businessmen and state enterprises to end up being successful there. In places like the United States, where state power is diffused across government agencies, alter strategies would be the more predominant reaction strategy, with success becoming influenced more by the ability of firms to capture regulatory privileges. One difference in impact across these two strategies is that ally strategies generally benefit individual firms, while the alter strategy can benefit the entire industry.

The model can be also extended to predict how changes in a country's political economy could lead to changes on how firms react to corruption. Over time, as firms grow and flourish, they will likely obtain more and more political resources in the form of financial resources, political connections, or institutional know-how; these firms will likely move from acceding to bribery arrangements towards greater attempts at altering regulation. The deregulation of particular industries will move firms from regulatory capture arrangements towards avoidance strategies, providing an alternative explanation as to why privatization in corrupt countries tends to benefit business groups (Ramamurti, 2000). The global spread of certain types of corporate governance structures are expected to affect the standards for acceptable firm behaviour in the newly adopting countries (Gardberg and Fombrun, 2006). These long-term transformations will influence both the choice and effectiveness of different firm strategies.

FUTURE RESEARCH ON CORRUPTION

  1. Top of page
  2. INTRODUCTION
  3. GOVERNMENT CORRUPTION: CONCEPTUAL FOUNDATIONS
  4. UNDERSTANDING GOVERNMENT CORRUPTION: CONTRIBUTIONS FROM THE MANAGEMENT LITERATURE
  5. TOWARDS AN INTEGRATIVE MODEL OF FIRM RESPONSES TO CORRUPTION
  6. FUTURE RESEARCH ON CORRUPTION
  7. CONCLUSION
  8. ACKNOWLEDGMENTS
  9. REFERENCES

This review indicates that despite the numerous inroads by management research into explaining the antecedents, processes, and outcomes of government–business interactions pertaining to corruption, many important issues remain unexplored. In particular, a complete understanding as to how and why certain firms are able to benefit from the phenomenon remains stunted by the fragmentation of the current research streams into divergent levels of analysis. The model described in the earlier section and the broad propositions provide new directions for understanding how corruption can be best understood by incorporating a multi-level analysis of the different drivers that motivate firm reaction to the phenomenon, as summarized in Table IV, and as illustrated in the remainder of this section.

Table IV.  Suggested directions for future corruption related research
ThemeResearch questionEmpirical analysis
Corruption studies in fields outside international business, institutional change, corporate political strategy, public organization, and social issues in managementHow does government corruption affect firm entrepreneurship, organizational behaviour, and taxation?Conduct empirical analyses pertinent to each management field.
Investigating firm reaction to corruption in emerging marketsDo firms react in similar manner to corruption in emerging markets?Replication of studies from developed country for emerging markets.
Analysis of processes by which firms interact with governmentsHow do firms interact with corrupt governments?Increased use of detailed case studies as a method of analysis.
Integration of organizational structure, political resources, industry regulation, and political/social institutions to explain corruptionHow do these four factors interact in explaining firm reactions to government corruption?Multi-level analysis incorporating all four drivers of firm strategy vis-à-vis government corruption.
Analysis of corruption as contingent on political institutionsHow do differences in political institutions moderate firm-industry responses to corruption?Inclusion of more political datasets and proxy variables that describe differences in corruption and political institutions across countries.
Analysis of corruption as contingent on socio-cultural institutionsHow do differences in social norms and cultural practices moderate firm–industry responses to corruption?Inclusion of more sociological datasets. More studies on the social processes of corruption.
Analysis of corruption as contingent on organizational structure and cultureHow do internal firm processes affect firm–industry reaction to corruption?Examine data on intra-firm processes for dealing with corruption. Inclusion of studies on non-profits, family businesses, state-owned enterprises, and small firms.
Investigating corruption as an international processHow does globalization and regulatory diffusion affect corruption levels and firm reaction to corruption?Use of region or trading blocs, in conjunction with country, as level of analysis. Analysis of multinational companies as source of regulatory transmission.

Corruption Research as Contingent on Political Institutions

As shown in this review, there is increasing empirical evidence demonstrating how national political institutions affect firm reactions to corruption (e.g. Cuervo-Cazurra, 2008b; Peng and Luo, 2000; Uhlenbruck et al., 2006). Despite the fact that there now exists a significant breadth of work on the impact of differing levels of corruption on industry and firm outcomes, much of this research has been conducted in developed countries, where the process of extracting political concessions is more transparent. As illustrated in the integrative corruption strategy model (Figure 2), the tools, motivations, and processes for regulatory capture in developed countries operate in a different manner in emerging markets, where government effectiveness, social values, and cultural practices differ greatly.

In order to properly assess the contingent nature of institutions in affecting the interaction between firms and governments, management research should capitalize on alternative measures of corruption across countries: such as political risk, political hazards, private property protection, rule of law, among others. Such data can provide further nuance that allows us to ascertain which particular aspects of government corruption are most detrimental to firm performance. As these indices now include annual data on the great majority of self-governing territories on the planet, this enhanced data availability provides researchers with rich panel data sources by which to explore inter-temporally the dynamic nature of the interaction between state corruption and firm behaviour.

However, beyond these governance datasets, social scientists have started utilizing alternative instrumental variables to measure this intrinsically difficult subject matter. For example, economists have utilized the volatility of stock prices of firms owned by politicians or the gap between reported trade between the exporting and importing nation as surrogate measures for the quality of government across countries (Fisman and Miguel, 2008). The use of these alternative constructs creates avenues by which the expanded government data can be juxtaposed against international firm-level data to explore the details of the interaction between corrupt firms and governments.

At the same time, there remains a need to publish more studies that examine the process of government–business interaction across the wide spectrum of government systems, from liberal democracies to military dictatorships (Pearce et al., 2008). This dearth of international comparative analyses of political strategy tools for dealing with governments with different levels of sovereign decision-making power should be seen as an important area of expansion. Political science and economics have already gone beyond the simplistic dichotomy of democracies versus dictatorships by intensely dissecting the factors that affect economic policies and social outcomes generated by structural differences among democracies (Persson and Tabellini, 2002) and autocracies (Besley and Kudamatsu, 2008); management science should capitalize on this burgeoning empirical work by contributing its analysis of the impact of private sector behaviour on political outcomes given differing levels of political contestation, popular representation, and government accountability.

Corruption Research as Contingent on Socio-Cultural Institutions

As mentioned earlier, research from the fields of social issues in management and international business using social and cultural indicators is streaming into the corruption research agenda, contributing to our understanding as to how these institutions explain the presence of corruption in different countries (e.g. DiRienzo et al., 2007; Husted, 1999) as well as to how firms respond to these corrupt practices (e.g. McCarthy and Puffer, 2002; Spicer et al., 2004). These studies can be further enhanced by the inclusion of different measurements of social norms beyond Hofstede's (1997) cultural variables. Among the previous social indicators that have been utilized in prior economic and sociological papers are colonial history, religion (La Porta et al., 1999), cultural areas (Paldam, 2002), inequality (You and Khagram, 2005), materialism, and welfare socialism (Cullen et al., 2004). These can provide novel insights into which particular social indicators are most salient in their impact on firm reactions to government corruption.

However, what remains most lacking is more thorough analyses of the processes by which social and cultural factors co-determine the private sector response to corrupt activities, given the power of social factors in determining the propensity of firms to engage in corruption even in the absence of legal sanction (Fisman and Miguel, 2007) or in habituating the acceptance of corruption as ‘the way things are done’ (You and Khagram, 2005). Studies have begun to explore how external cultural practices are transmitted into the corporate culture (Child and Moellering, 2003), managerial perceptions (Cullen et al., 2004), and firm activity (Martin et al., 2007; Wu, 2009), but these studies remain limited.

By investigating the mechanisms behind the spread of these social processes, it may lead to further understanding of whether these same cultural norms that affect private sector responses similarly influence corruption outcomes. Using China as its example, pundits have claimed that the same Chinese historical or cultural antecedents that explain the prevalence of corrupt government practices play an integral role that prevents its existence from undermining the functioning of the economy at large. One argument is that Chinese guanxi, or its cultural predilection to facilitate economic transactions through informal social networks, generates interpersonal trust-based relationships among corrupt officials and private enterprises that legitimizes illicit payments but at the same time ensures the efficient delivery of services promised to the bribe-payer (Li and Wu, 2007). In this case, intra-network trust allows corruption to become endemic without much of the negative repercussions created by political uncertainty. Although verifying this particular research proposition may be difficult, it points a way towards finding alternative research questions that illustrate the multi-faceted impact of culture and other social norms in explaining both the causes and consequences of corruption.

Corruption Research as Contingent on Organizational Structure and Corporate Culture

Based on this review, the area that has received the least attention from scholars corresponds to studies investigating the contingent role provided by the formal rules and informal organizational cultural practices within each firm that influence the firm activity in response of corruption. The detailing of the intra-government political process has been conducted without a parallel analysis of the intra-corporation political processes that expedite the implementation of political strategies, except for a limited number of studies that show how internal structures affect the ethical behaviour of firms (e.g. Delmas and Toffel, 2008; Luo, 2006; Zahra et al., 2005). Examples abound in the business world of companies that refuse to involve themselves in corrupt practices, despite favourable performance implications and strong social pressures to do so. There are also companies whose employees conduct themselves unethically even within low corruption external environments. These studies can draw upon recent innovative work conducted in the field of corporate governance, public organization and business ethics isolating the role played by company structure (Shaffer and Hillman, 2000), organizational identity orientation (Brickson, 2007), and incentive systems (Benz and Frey, 2007) in promoting ethical behaviour. Despite these advances, much of this prior research remains focused on large public corporations, requiring additional research to validate whether their findings similarly hold for other types of organizations such as family corporations, small firms, state-owned enterprises, or non-profit organizations (Laplume et al., 2008).

At the same time, this strand of management research can explore the interaction between these intra-organizational variables vis-à-vis the national laws and social norms in affecting firm behaviour. Research on this subject matter can draw from work in the international business literature that explores how firm level attributes within multinational enterprises affect their ability to deal with institutional differences between their home countries and new markets (Hillman and Wan, 2005; Xu and Shenkar, 2002). These papers support the premise that political activity necessitates conformity to legitimizing forces that are internal and external to the firm.

Corruption Research as an International Process

With deepening economic globalization, national governments are likely to act in concert leading to political and social outcomes that become less the sole function of domestic conditions but instead assimilate much of the government activity conducted in other nations (Schneiberg and Bartley, 2008; Simmons and Elkins, 2004). Moreover, globalization has prompted the implicit devolution of regulatory sovereignty to international agencies, regional trade blocs, and powerful civil organizations. The interdependence of states promotes the enactment of imported public policies that may or may not be suited for the socio-economic development of particular countries (Lazer, 2001; Levi-Faur and Jordana, 2005). Although the processes of regulatory diffusion have been studied in detail in the political science literature, this concept has not been fully incorporated into the management literature. Regulatory interdependence and diffusion highlights how firms should anticipate government policy by not solely focusing on the political framework of the country being studied, but by also monitoring the policies of states that influence the focal nation's policies (Koka et al., 1999). As such, this concept of regulatory interdependence begs the question of whether country is the most appropriate unit of analysis for government corruption studies, when much policy-making is now conceptualized on a regional basis.

Globalization research could draw from international business research on multinational firms, given how multinationals play a strong role in influencing global efforts to tackle corruption. Multinational firms, which traditionally have come from developed nations, have acted as conduits for the propagation of positive global standards across borders (e.g. Christmann, 2004; Terlaak, 2007). However, the rise of multinational firms from countries where state governance is not as clean will complicate the diffusion of anti-corruption measures across the world and provide new research questions about international corruption patterns.

CONCLUSION

  1. Top of page
  2. INTRODUCTION
  3. GOVERNMENT CORRUPTION: CONCEPTUAL FOUNDATIONS
  4. UNDERSTANDING GOVERNMENT CORRUPTION: CONTRIBUTIONS FROM THE MANAGEMENT LITERATURE
  5. TOWARDS AN INTEGRATIVE MODEL OF FIRM RESPONSES TO CORRUPTION
  6. FUTURE RESEARCH ON CORRUPTION
  7. CONCLUSION
  8. ACKNOWLEDGMENTS
  9. REFERENCES

This article reviews work published in the leading management journals that analyses the impact of government corruption on firm behaviour. I note that although the management literature has produced a number of excellent research papers dealing with corruption and provide a substantial contribution to our understanding of corruption antecedents, processes and outcomes, these papers generally come from diverse fields within management, like corporate political strategy, social issues in management and international business, among others, that could be more thoroughly integrated to provide a more complete picture of the impact of corruption on firms. By integrating these disparate findings, I underscore the heterogeneous impact of government corruption on firm outcomes, dependent not only on the power wielded by dishonest officials, but also influenced by firm characteristics, industry regulations, political structures, social norms, and organizational culture.

The fact that this paper showcases how numerous firms benefit from corruption does not mean that we can conclude that the impact of government corruption can be benign. On the contrary, most studies reviewed in the paper still indicate that overall, government corruption retains a substantial corrosive impact on the long-term health of the global economic system. However, what this paper hopes to emphasize is that given how the effect of corruption is not uniform across firms, any attempt to eliminate government corruption must be mindful of the reaction of the numerous public and private stakeholders that benefit from its illicit largesse.

In addition, this review paper showcases the unique contribution provided by the management field in the analysis of government through management research's focus on detailing the complex interactions between firms and governments, with an integrative viewpoint that bridges disciplinary paradigms (Hambrick, 1994; Shaffer, 1995). By leveraging the large body of research on management and organizations with the latest theories in economics, sociology, and political science, management research can provide a more comprehensive understanding of the social processes that generate global public policy.

ACKNOWLEDGMENTS

  1. Top of page
  2. INTRODUCTION
  3. GOVERNMENT CORRUPTION: CONCEPTUAL FOUNDATIONS
  4. UNDERSTANDING GOVERNMENT CORRUPTION: CONTRIBUTIONS FROM THE MANAGEMENT LITERATURE
  5. TOWARDS AN INTEGRATIVE MODEL OF FIRM RESPONSES TO CORRUPTION
  6. FUTURE RESEARCH ON CORRUPTION
  7. CONCLUSION
  8. ACKNOWLEDGMENTS
  9. REFERENCES

I would like to thank General Editor Andrew Delios, Núria Mas, Jean Boddewyn, Narayan Bulusu, Joan Enric Ricart, Miguel Cantillo, Johanna Mair, Fabrizio Ferraro, Benito Arruñada, Young-Choon Kim, Kim Chi Trinh, Sai Yayavaram, Mark Mizruchi, Marc Schneiberg, anonymous reviewers, and participants at the 2009 Academy of Management Conference and National University of Singapore research seminar for their comments on earlier drafts of the paper. I gratefully acknowledge financial support from the IESE Business School.

REFERENCES

  1. Top of page
  2. INTRODUCTION
  3. GOVERNMENT CORRUPTION: CONCEPTUAL FOUNDATIONS
  4. UNDERSTANDING GOVERNMENT CORRUPTION: CONTRIBUTIONS FROM THE MANAGEMENT LITERATURE
  5. TOWARDS AN INTEGRATIVE MODEL OF FIRM RESPONSES TO CORRUPTION
  6. FUTURE RESEARCH ON CORRUPTION
  7. CONCLUSION
  8. ACKNOWLEDGMENTS
  9. REFERENCES
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