Introduction
Corruption is a relentless grand global challenge that has been implicated as the root cause of numerous social and economic maladies (Argandoña
2007). The Sustainable Development Goals (SDG) agenda developed by the United Nations (UN) is comprised of 17 goals that have been designed to protect the planet and improve the living conditions of its inhabitants (Voegtlin and Scherer
2017). One of these goals (SDG 16) targets to “substantially reduce corruption and bribery in all their forms” (United Nations
2015). The gravity of this imperative is undeniable given the recent sobering observation that more than 80% of the world’s population lives in a country with “a serious corruption problem” (Transparency International
2016). Scholars have concluded that corruption has become one of the world’s most pressing challenges, affecting “environmental protection efforts, human rights, national security, access to healthcare and justice services, economic development and the legitimacy of governments around the world” (Feathers
2014, p. 287). In fact, researchers and policy makers have observed that corruption is particularly harmful to humans and society because it threatens to undermine progress with respect to several other pressing SDGs that have been developed to reduce inequality and improve living standards (Trapnell et al.
2017). As examples, the SDGs adopted by the UN include goals pertaining to the alleviation of poverty (SDG 1), enhancing health and well-being (SDG 3), improving education (SDG 4), and ensuring access to clean water and sanitation (SDG 6). However, scholars have found that corruption adversely impacts health and well-being by limiting access to public health clinics, reducing immunization rates and delaying the vaccination of newborns (Azfar and Gurgur
2008). Further, countries characterized by widespread corruption have experienced lower levels of educational attainment and a lower likelihood that their citizens will escape the poverty trap (Eicher et al.
2009). Researchers have also found a statistically significant negative relationship between the level of corruption in a country and access to both adequate drinking water and sanitation (Anbarci et al.
2009). Consequently, reducing corruption has become an important component of the sustainable development agenda (Trapnell et al.
2017).
In elaborating a role for management researchers in efforts to address the grand challenges highlighted by the UN’s SDGs, George et al. (
2016) propose that scholars should focus on deepening our comprehension of stubborn societal problems. Building on this proposition, researchers have observed that corporate anti-corruption programs can play a central role in both combatting corruption (Argandoña
2017a) and attaining sustainable development because “anti-corruption efforts…underpin the achievement…of all other SDGs” (Trapnell et al.
2017, p. 36). However, assessments with respect to the efficacy of corporate anti-corruption codes and programs have been mixed. While some have suggested that they have shown some “ability to foster ethical behaviors” (Mercier and Deslandes
2017, p. 781), others have concluded that there is “no definitive evidence that codes have a significant effect on ethical behavior in organizations” (Painter-Morland
2010, p. 266). Heeks and Mathisen (
2012) propose that the effectiveness of anti-corruption initiatives can be undermined by “design-reality gaps” whereby theoretical assumptions embedded within the design of anti-corruption programs fail to accurately reflect the reality of the contexts within which these initiatives are deployed. Two prominent sources of potential misalignment include a narrow conceptualization of corruption (Persson et al.
2013) and an underdeveloped comprehension of how firms respond to corruption (Hansen
2011). Consistent with this perspective, scholars have observed that two assumptions frequently underpin the strategic and policy prescriptions of anti-corruption theorists. First, corruption is conceptualized as occurring primarily within a multinational corporation’s (MNC’s) public sector transactions with government officials and bureaucrats (Goel et al.
2015). In this regard, legal scholars (Green
2013) and economists (Hodgson and Jiang
2007, p. 1043–1044) have observed that the prevailing conceptualization of corruption has constrained the scope of research inquiry “to the public sector, despite the fact that private sector corruption is often acknowledged.” Second, engaging a “middleperson” such as a joint venture (JV) partner is assumed to be a key strategy employed by MNCs to manage the uncertainty and transaction costs precipitated by more pronounced government corruption (Bray
2005; Drugov et al.
2014). Consequently, the efficacy of scholarly recommendations with respect to corporate anti-corruption programs risks being impeded by underdeveloped assumptions with respect to how corruption is conceptualized and how firms respond to corruption.
To address these limitations, business ethics scholars have become more focused upon enhancing our understanding of the various types of corruption that firms encounter in foreign markets (Luiz and Stewart
2014; Van Vu et al.
2018), as well as the different strategic, structural and operational responses of MNCs to heightened levels of corruption (Godinez and Liu
2018; Orudzheva et al.
2018; Xie et al.
2018). In doing so, ethics scholarship (Clark and Brown
2015; Gago-Rodríguez et al.
2018; Hauser
2018; Remišová et al.
2018) is generating new research insights that are helping to inform the efforts of anti-corruption scholars who endeavor to design better strategies to curb MNC engagement in foreign market corruption.
We build on this research tradition in the ethics literature in two important ways. First, we leverage the work of business ethicists’ who have advocated in favour of broadening the conceptualization of corruption and elaborating the nature and effects of different types of corruption, particularly private sector corruption and public sector corruption (Argandoña
2003,
2017b; Gopinath
2008). Second, we extend the work of ethics scholars who have theorized that corruption and the uncertainty that it precipitates may impact the organizational structure of foreign subsidiary investments (Godinez and Liu
2018; Luiz and Stewart
2014). In this regard, Montiel et al. (
2012) have proposed that different manifestations of corruption may precipitate distinct uncertainties for firms and exert disparate impacts upon firm decision-making.
As such, we ask:
How do the perceived levels of public sector (government) corruption and private sector (non-government) corruption impact upon the organizational structure of a MNC’s foreign subsidiaries? We apply an uncertainty-based perspective (Sartor and Beamish
2018) to focus on the distinct mechanisms through which the two types of corruption can be expected to influence the structure of foreign subsidiary investments. When MNCs enter into foreign markets characterized by more pronounced host market corruption, we anticipate that public and private corruption will each exert distinct effects upon the organizational structure of their subsidiaries. This is because each type of corruption can be expected to foster different types of uncertainty and risk which predominate in shaping the MNC’s choice with respect to the structure of its foreign subsidiary (wholly-owned subsidiary (WOS) versus JV with a local partner). In the case of public corruption, we expect that environmental uncertainty and knowledge-based risk will be the primary uncertainty and risk influencing the MNC’s structural decision. Conversely, in the case of private corruption, behavioral uncertainty and opportunism-based risk will predominate in shaping the MNC’s preference.
Hypotheses are developed pertaining to the impact of each type of corruption upon a MNC’s choice between a WOS and a JV with a local partner. We test these hypotheses and find that each type of corruption exerts a distinct impact upon the organizational structure of foreign subsidiary investments. More precisely, while heightened levels of public corruption were found to motivate MNCs to invest through a JV with a local partner rather than a WOS, more pronounced private corruption precipitated the opposite outcome.
Our research makes several contributions. First, building on ethics scholarship that has expanded the conceptualization of corruption, we apply an uncertainty-based perspective to examine the effects of both private and public corruption upon the strategic decisions of foreign-investing MNCs. Second, our findings bolster the efforts of theorists who have endeavored to enhance our understanding of the impact of corruption upon the organizational structure of foreign subsidiaries. Third, we contribute new insights which serve to broaden the set of assumptions that can be employed by scholars who develop prescriptions that are intended to narrow design-reality gaps in corporate anti-corruption programs. In doing so, our work responds to George et al. (
2016, p. 1887) who urge management researchers to assist in the transformation of “stubborn societal problems into tractable managerial challenges” for which solutions can be devised. In this regard, our research buttresses the efforts of business ethics scholars, policy makers and managers who strive to both curtail MNC engagement in overseas corruption and advance the UN’s sustainable development agenda.
The remainder of our paper is organized as follows. In the “
Theory and Hypotheses” section, we present some of the literature that has contributed to elaborating the distinction between private and public corruption, in addition to highlighting some of the main tenets of transaction cost theory. Moreover, we review the uncertainty-based perspective that we apply in our work and we present hypotheses with respect to the impact of both private and public corruption upon the organizational structure of foreign subsidiaries. We describe our study’s sample and discuss both the estimation techniques and variable measures in the “
Methods” section, followed by the presentation of our empirical findings in the “
Results” section. In the “
Discussion and Conclusions” section, we summarize our study, highlight its contributions and discuss its potential limitations.
Results
Table
2 provides descriptive statistics and Table
3 presents the results of the multilevel logistic regression estimations. The highest variance inflation factor (VIF) score (3.79) reported for our models in Table
3 is less than the benchmark value of 10 (Tabachnick and Fidell
2007) and the average VIF across all of our models is 2.04. Further, none of the correlations between the variables in our models exceed the 0.70 threshold (Tabachnick and Fidell
2007). Accordingly, we concluded that multicollinearity was not a concern in our regression estimations.
Table 2
Descriptive statistics and correlations
1. Organizational structurea | 0.21 | 0.41 | | | | | | | |
2. Subsidiary size | − 2.88 | 1.36 | − 0.02 | | |
3. Parent size | 5.18 | 0.91 | 0.12 | − 0.60 | |
4. Parent profitability | − 1.28 | 0.35 | − 0.09 | − 0.06 | − 0.14 |
5. Parent host market experienceb | 0.17 | 0.52 | 0.17 | − 0.37 | 0.57 | − 0.07 | | | |
6. Entry year dummy (2005) | 0.26 | 0.44 | − 0.19 | − 0.12 | 0.07 | 0.08 | − 0.07 | | |
7. Entry year dummy (2006) | 0.32 | 0.47 | − 0.06 | 0.01 | − 0.05 | 0.03 | 0.00 | − 0.41 | |
8. Entry year dummy (2007) | 0.24 | 0.43 | 0.16 | − 0.01 | − 0.04 | 0.15 | 0.04 | − 0.34 | − 0.38 |
9. Industry dummy | 0.22 | 0.42 | 0.12 | 0.07 | − 0.02 | − 0.01 | − 0.01 | − 0.02 | − 0.02 |
10. Host market size | 2.89 | 0.65 | − 0.11 | − 0.11 | − 0.02 | 0.12 | 0.20 | 0.05 | − 0.06 |
11. Host market growth rate | 5.21 | 2.33 | 0.14 | 0.08 | 0.16 | − 0.24 | − 0.10 | 0.07 | − 0.16 |
12. FDI restrictions | 30.22 | 22.43 | − 0.01 | 0.00 | 0.10 | 0.01 | 0.01 | − 0.09 | 0.05 |
13. Policy stability | 0.38 | 0.19 | 0.00 | − 0.05 | 0.07 | 0.09 | − 0.02 | − 0.16 | 0.02 |
14. Cultural distance | 16.21 | 9.17 | − 0.08 | 0.05 | − 0.05 | 0.02 | 0.07 | 0.03 | − 0.03 |
15. Public sector corruption | 3.37 | 0.59 | 0.20 | − 0.07 | 0.18 | − 0.11 | 0.04 | − 0.20 | − 0.01 |
16. Private sector corruption | 2.88 | 0.31 | − 0.06 | − 0.17 | 0.00 | 0.04 | 0.13 | − 0.15 | − 0.14 |
17. Public corruption × private corruption | 0.10 | 0.24 | − 0.10 | − 0.12 | 0.16 | − 0.02 | 0.04 | 0.20 | − 0.06 |
9. Industry dummy | 0.08 | | | | | | | | |
10. Host market size | 0.04 | 0.04 | | | | | | | |
11. Host market growth rate | − 0.03 | − 0.07 | − 0.54 | | | | | | |
12. FDI restrictions | − 0.02 | 0.04 | − 0.14 | 0.16 | | | | | |
13. Policy stability | 0.15 | 0.06 | 0.46 | − 0.22 | 0.44 | | | | |
14. Cultural distance | − 0.02 | 0.00 | 0.06 | − 0.15 | − 0.03 | − 0.29 | | | |
15. Public sector corruption | 0.06 | 0.05 | 0.08 | 0.15 | 0.12 | 0.52 | − 0.24 | | |
16. Private sector corruption | 0.23 | − 0.04 | 0.57 | − 0.34 | − 0.25 | 0.42 | − 0.21 | 0.48 | |
17. Public corruption × private corruption | − 0.08 | − 0.12 | − 0.26 | 0.38 | − 0.06 | − 0.40 | − 0.22 | − 0.44 | − 0.20 |
Table 3
Results of multilevel logistic regression analyses of public corruption and private corruption on the organizational structure of foreign subsidiaries
Intercept | − 1.46 (0.58)* | − 1.71 (0.59)** | − 1.38 (0.62)* | − 2.02 (0.80)* | − 2.18 (0.85)* |
Subsidiary size | 0.14 (0.25) | 0.21 (0.23) | 0.12 (0.23) | 0.13 (0.24) | 0.12 (0.24) |
Parent size | 0.25 (0.59) | 0.35 (0.48) | 0.43 (0.59) | 0.38 (0.51) | 0.36 (0.51) |
Parent profitability | − 0.02 (0.97) | − 0.07 (0.98) | 0.04 (0.98) | 0.02 (0.96) | 0.09 (0.98) |
Parent host market experience | 0.60 (0.97) | 0.34 (0.80) | 0.29 (0.97) | 0.36 (0.96) | 0.39 (0.97) |
Industry dummy | 0.78 (0.60) | 0.87 (0.52)t | 0.78 (0.54) | 0.80 (0.56) | 0.83 (0.56) |
Entry year dummy (2005) | − 2.38 (3.58) | − 5.60 (4.53) | − 5.89 (8.03) | − 7.45 (4.19)t | − 8.16 (4.24)t |
Entry year dummy (2006) | − 0.62 (0.64) | − 0.46 (0.63) | − 0.96 (0.68) | − 1.14 (0.72) | − 1.33 (0.78)t |
Entry year dummy (2007) | 0.37 (0.68) | 0.60 (0.68) | 0.53 (0.73) | 1.18 (0.86) | 1.21 (0.88) |
Host market size | − 0.81 (1.17) | − 0.13 (0.74) | 0.04 (0.84) | 2.05 (1.31) | 2.06 (1.26) |
Host market growth rate | 0.11 (0.13) | 0.12 (0.15) | 0.08 (0.14) | 0.13 (0.19) | 0.02 (0.25) |
FDI restrictions | − 0.02 (0.02) | − 0.01 (0.01) | − 0.02 (0.02) | − 0.03 (0.02) | − 0.03 (0.02) |
Policy stability | 0.46 (3.41) | − 3.55 (2.88) | 0.69 (2.40) | − 6.21 (3.87) | − 5.28 (4.03) |
Cultural distance | − 0.02 (0.03) | − 0.03 (0.03) | − 0.05 (0.04) | − 0.13 (0.07)t | − 0.13 (0.07)t |
Public sector corruption | | 1.31 (0.63)* | | 3.32 (1.23)** | 3.88 (1.54)* |
Private sector corruption | | | − 2.60 (1.44)t | − 6.74 (2.88)* | − 7.77 (3.29)* |
Public corruption × private corruption | | | | | 2.12 (3.04) |
Variance inflation factor range | 1.03–2.66 | 1.03–3.36 | 1.04–3.00 | 1.06–3.40 | 1.06–3.79 |
Average variance inflation factor | 1.86 | 1.91 | 1.98 | 2.09 | 2.35 |
Model deviance | 156.38 | 151.45 | 152.15 | 137.75 | 137.26 |
∆ devianceb | | 4.93 | 4.23 | 18.63 | 19.12 |
AIC | 200.38 | 197.45 | 198.15 | 185.75 | 187.26 |
∆ AICc | 14.63 | 11.70 | 12.40 | 0.00 | 1.51 |
In Table
3, we present the base model which excludes the effects of the two focal corruption variables, along with the models that include the main effects and the interaction effect associated with public and private corruption. Consistent with the expectations posed in Hypothesis
1, the results presented in Model 2 which introduces public corruption alone indicate that this main effect is a significant predictor of a foreign subsidiary’s organizational structure (Model 2:
β = 1.31,
p < 0.05). The results suggest that higher perceived levels of public corruption increase the likelihood that MNCs will invest through a JV with a local partner, rather than a WOS. Model 3 presents the results when private corruption alone is added to the base model to test Hypothesis
2. The results indicate that the main effect of private corruption is also a significant predictor of a subsidiary’s organizational structure (Model 3:
β = − 2.60,
p < 0.10). Firms are more likely to employ a WOS investment structure to facilitate entry into foreign host markets characterized by heightened perceived levels of private corruption. To investigate the effects of both types of corruption simultaneously, Model 4 introduces the main effects of both public and private corruption. Consistent with the expectations posed by Hypotheses 1 and 2, more pronounced perceived levels of public corruption continued to predict an increased likelihood that a MNC would invest through a JV with a local partner (Model 4:
β = 3.32,
p < 0.01). Conversely, higher perceived levels of private corruption precipitated the opposite outcome, namely, an increased likelihood of structuring the foreign subsidiary investment as a WOS (Model 4:
β = − 6.74,
p < 0.05).
Finally, the results associated with Model 5 which tests Hypothesis
3 reveal that the interaction effect between public and private corruption does not have a statistically significant impact upon the structure of a MNC’s foreign subsidiary investments (
β = 2.12, p > 0.10). However, the results with respect to the main effects of public (Model 5:
β = 3.88,
p < 0.05) and private corruption (Model 5:
β = − 7.77,
p < 0.05) are consistent with the outcomes predicted in Hypotheses 1 and 2. As such, while Hypotheses 1 and 2 are supported by the results presented in Models 2, 3, 4 and 5, Hypothesis
3 is not supported. Taken together, the non-significance of the interaction effect in Model 5, coupled with the significance of the public and private corruption main effects in Models 2, 3, 4 and 5 of Table
3, suggest that public and private corruption do not interact to impact upon the organizational structure of a MNC’s foreign subsidiary investment. Instead, the results reveal that it is the main effects of these conflicting forces that ultimately influence the organizational structure of foreign subsidiaries that are established in more corrupt host markets. The results also reveal that Model 4 exhibits the lowest Akaike information criterion (185.75) (Burnham and Anderson
2004; Liu
2015).
Robustness Estimations
To test the robustness of the results reported in Table
3, we executed additional models using the 80, 90 and 95% equity ownership cut-off conventions that have been used in the literature to distinguish between WOSs and JVs (Park and Ungson
1997; Yiu and Makino
2002). Employing these alternate conventions, the results were substantially similar in terms of the sign (±) and the significance of the main effects of public corruption and private corruption across all of the models, with the primary exception being that the main effect of private corruption became significant at the
p < 0.01 level in Model 4 when the 80% cut-off convention was used.
We also investigated the possibility that two of the sectors that are incorporated into the measure of private corruption (media and religious bodies) may not be purely private sector entities in some of the 19 countries that we study. To do so, we leveraged prior cross-country research pertaining to government involvement in religious organizations and media organizations (Barro and McCleary
2005; Djankov et al.
2003). We determined that some of the subsidiary investments in our sample were established in a country with a state religion during our study period (i.e., Protestantism in the United Kingdom; Catholicism in Italy; Buddhism in Thailand, etc.) (Barro and McCleary
2005) and some were established in a country within which the top five daily newspapers were not owned entirely by private sector individuals and entities (Djankov et al.
2003). Therefore, as a robustness check on our results, we re-executed each of the models reported in Table
3 using a two-item measure of private sector corruption which was constituted by the indicators of corruption pertaining to businesses and NGOs (and excluded the items pertaining to the media and religious bodies). Employing the two-item measure of private sector corruption, the results were substantially similar in terms of the sign (±) and the significance of the main effects of public corruption and private corruption across all of the models, with the primary exception being that the main effect of public corruption became significant at the
p < 0.01 level in Model 5.
As discussed in the “
Estimation Methods” section, we also tested whether our results were robust to an alternate regression method. Table
4 presents the results of the ordinary logistic regression models that were estimated as a robustness check on the multilevel logistic regression results that are reported in Table
3. As Table
4 indicates, the results were substantially similar to the results reported in Table
3 in terms of the sign (±) and the significance of the main effects of public corruption and private corruption across all of the models. The primary exception to this is that the main effect of private corruption became significant at the
p < 0.01 level in Model 4. Further, some of the covariates (such as
parent MNC host market experience and
FDI restrictions) that were not significant in the multilevel models that are reported in Table
3 became significant in some of the binary logistic regression models reported in Table
4.
Table 4
Results of ordinary logistic regression analyses of public corruption and private corruption on the organizational structure of foreign subsidiaries
Intercept | 1.07 (2.55) | − 2.23 (3.03) | 5.75 (3.69) | 4.65 (3.87) | − 0.32 (2.74) |
Subsidiary size | 0.02 (0.19) | 0.05 (0.19) | − 0.05 (0.19) | − 0.10 (0.20) | − 0.10 (0.21) |
Parent size | − 0.03 (0.36) | − 0.01 (0.36) | − 0.10 (0.37) | − 0.14 (0.38) | − 0.14 (0.39) |
Parent profitability | − 0.03 (0.63) | 0.04 (0.63) | − 0.05 (0.63) | 0.07 (0.65) | 0.07 (0.65) |
Parent host market experience | 1.07 (0.51)* | 1.00 (0.51)t | 1.14 (0.51)* | 1.09 (0.53)* | 1.09 (0.53)* |
Industry dummy | 0.69 (0.45) | 0.65 (0.46) | 0.59 (0.46) | 0.47 (0.48) | 0.47 (0.48) |
Entry year dummy (2005) | − 1.57 (0.72)* | − 1.38 (0.72)t | − 1.95 (0.77)* | − 1.73 (0.77)* | − 1.73 (0.77)* |
Entry year dummy (2006) | − 0.75 (0.58) | − 0.64 (0.59) | − 1.05 (0.61)t | − 1.15 (0.64)t | − 1.15 (0.65)t |
Entry year dummy (2007) | 0.03 (0.58) | 0.24 (0.61) | − 0.03 (0.59) | 0.48 (0.67) | 0.48 (0.67) |
Host market size | − 0.92 (0.57) | − 0.73 (0.59) | − 0.60 (0.59) | 0.43 (0.76) | 0.44 (0.77) |
Host market growth rate | 0.13 (0.11) | 0.13 (0.12) | 0.10 (0.11) | 0.12 (0.14) | 0.12 (0.17) |
FDI restrictions | − 0.01 (0.01) | − 0.01 (0.01) | − 0.02 (0.01)t | − 0.02 (0.01)t | − 0.02 (0.01)t |
Policy stability | 1.42 (1.72) | − 0.89 (2.17) | 2.46 (1.82) | − 1.95 (2.59) | − 1.99 (2.74) |
Cultural distance | − 0.02 (0.03) | − 0.02 (0.03) | − 0.03 (0.03) | − 0.06 (0.04) | − 0.06 (0.04) |
Public sector corruption | | 1.00 (0.49)* | | 2.28 (0.77)** | 2.25 (0.91)* |
Private sector corruption | | | − 1.78 (1.04)t | − 4.38 (1.59)** | − 4.35 (1.72)* |
Public corruption × private corruption | | | | | − 0.09 (1.85) |
Variance inflation factor range | 1.03–2.66 | 1.03–3.36 | 1.04–3.00 | 1.06–3.40 | 1.06–3.79 |
Average variance inflation factor | 1.86 | 1.91 | 1.98 | 2.09 | 2.35 |
X2 | 26.21* | 30.86** | 29.50** | 42.65*** | 42.65*** |
Pseudo R2 (∆R2 compared to Base Model) | 0.14 | 0.17 (0.03) | 0.16 (0.02) | 0.23 (0.09) | 0.23 (0.09) |
Finally, given the non-linear nature of logistic regression, the coefficients can be more challenging to interpret (Tabachnick and Fidell
2007). As such, we also assessed the substantive or practical significance of our results by calculating the predicted probabilities (Long and Freese
2014) of a MNC from our sample investing through a JV with a local partner at different perceived levels of private corruption and public corruption. We hypothesized a positive relationship between the perceived level of private corruption and the likelihood of a WOS (or conversely, a negative relationship between the perceived level of private corruption and the likelihood of a JV with a local partner). The results of the regression estimations supported this hypothesis. Consistent with this finding, the predicted probability of a MNC in our sample establishing a JV with a local partner at a perceived level of private corruption one standard deviation below the mean of private corruption was 43.9%, whereas it was 10.9% at a perceived level of private corruption one standard deviation above the mean. We also hypothesized a positive relationship between the perceived level of public corruption and the likelihood of a JV with a local partner. Again, the results supported this hypothesis. Consistent with this finding, the predicted probability of a MNC from our sample establishing a JV with a local partner at a perceived level of public corruption one standard deviation below the mean of public corruption was 8.8%, whereas it increased to 39.4% at a perceived level of public corruption one standard deviation above the mean.
Discussion and Conclusions
Both the UN’s Global Compact and its SDGs implore stakeholders to work against all forms of corruption. Despite the urgency of this objective, corruption has persisted as an unrelenting global challenge that has been implicated as the root cause of numerous social and economic maladies. For example, economists have established that countries with high levels of corruption suffer from higher levels of poverty and income inequality because corruption reduces the resources available to fund public services such as education and healthcare (Gupta et al.
2002; Rose-Ackerman and Palifka
2016). Given that the International Monetary Fund (IMF) has recently estimated that the annual cost of bribery now amounts to approximately 2% of global gross domestic product (IMF
2016), a compelling imperative continues to motivate scholars’ efforts to deepen our comprehension with respect to the nature of foreign host market corruption and its impact on the strategic and structural decisions of MNCs, in order to contribute to efforts to curb MNC engagement in foreign market corruption. As such, our research has asked:
How do the perceived levels of public sector (government) corruption and private sector (non-government) corruption impact upon the organizational structure of a MNC’s foreign subsidiaries?
Our research makes several contributions. First, building on ethics scholarship that has broadened the conceptualization of corruption (Argandoña
2003,
2017b; Gopinath
2008), we have examined the effects of both private and public corruption upon the strategic decisions of foreign-investing MNCs. Given that corruption taxonomies have primarily focused on public corruption, the narrow conceptualization of the construct has traditionally constrained the scope of research inquiry to the domain of bureaucratic activity. However, practical concerns are motivating the need to enhance our understanding of the private corruption construct. More specifically, achieving the targets established for the UN’s SDGs is predicated upon the existence of sustained global economic growth (United Nations
2015). However, private corruption has been associated with both substantial declines in equity markets worldwide and subsequent global economic contractions on two separate occasions during the first decade of the twenty-first century (Ashforth et al.
2008; Tridico
2012; Weismann
2009). Equally-troubling, scholars have argued that private corruption engenders a wide range of adverse organizational consequences including, among others, lost revenues (Vadera et al.
2009), inefficient resource allocation (Green
2013) and the deterrence of capability-building (Luo
2005). In addition to amplifying the negative social, political and distributional effects of public corruption (Gopinath
2008), scholars have also proposed that private corruption may undermine shareholder value both indirectly, as a consequence of fines and penalties (Bishara and Schipani
2009), and directly through the depreciation of a firm’s market capitalization (Narayanan et al.
2007). Our desire to focus more attention on private corruption may help to inform the development of managerial strategies that can be implemented to alleviate the adverse organizational effects of private corruption (Lambsdorff and Schulze
2015). Ultimately, “an understanding of private corruption is vital to any assessment of the role of business in society and of the effects of firms on the environment of corruption” (Rodriguez et al.
2006, p. 739).
Second, we have investigated how the perceived levels of private and public corruption each impact upon the organizational structure of a MNC’s foreign subsidiaries. In addition to the practical urgency that we described above, our efforts have also been motivated by a sense of theoretical urgency. More specifically, scholars have proposed that the pervasiveness of host market corruption should influence a MNC’s choice between two distinct organizational structures—a WOS and a JV with a local partner (Rodriguez et al.
2005). However, empirical studies have yielded conflicting results that have not fully substantiated this theoretically expected outcome (Asiedu and Esfahani
2001; Chang et al.
2012; Demirbag et al.
2007). Consequently, researchers have advocated in favor of more clearly elaborating the nature and effects of different types of corruption (Montiel et al.
2012), particularly public sector and private sector corruption (Argandoña
2003,
2017b; Gopinath
2008). As Montiel et al. (
2012, p. 1105) have observed, corruption is a “complex phenomenon that requires more fine-grained research…distinguishing between different dimensions of corruption can contribute to our understanding of its effects on firm behavior.”
We have contributed to this research agenda by applying an uncertainty-based perspective that is grounded in transaction cost theory (Sartor and Beamish
2018) to detail the different mechanisms through which public and private corruption can be expected to influence the organizational structure of foreign subsidiaries. We proposed that when MNCs encounter more pronounced corruption in foreign markets, public and private corruption can each be expected to exert distinct effects. Hypotheses were tested using a new measure of private sector corruption developed by Gutmann and Lucas (
2018). We found that whereas more pronounced perceived levels of public corruption in foreign host countries motivated MNCs to prefer JVs with a local partner (rather than WOSs), heightened perceived levels of private sector corruption prompted MNCs to structure their foreign subsidiaries as WOSs. We attribute these distinct strategic responses to the different uncertainties and risks that underpin the relationship between the perceived level of each type of host market corruption and the organizational structure of an MNC’s foreign subsidiary investment. More specifically, in the case of public corruption, environmental uncertainty and knowledge-based risk are the primary uncertainty and risk that influence the MNC’s structural decision. Conversely, in the case of private corruption, behavioral uncertainty and opportunism-based risk predominate in shaping the MNC’s preference. Our empirical findings and efforts to disaggregate host market corruption into both public and private corruption collectively help to clarify and improve our theoretical comprehension of the relationship between the perceived level of host market corruption and the organizational design decisions of foreign-investing MNCs.
Third, our research has built on the recent work of business ethics scholars who have become more focused upon enhancing our understanding of the various types of corruption that firms encounter in foreign markets (Luiz and Stewart
2014; Van Vu et al.
2018), as well as the different strategic, structural and operational responses of MNCs to heightened levels of corruption (Godinez and Liu
2018; Orudzheva et al.
2018; Xie et al.
2018). In doing so, we extend the body of business ethics scholarship (Clark and Brown
2015; Gago-Rodríguez et al.
2018; Gorsira et al.
2018; Hauser
2018; Remišová et al.
2018) that is generating theory to help inform the efforts of scholars who endeavor to design better corporate anti-corruption strategies and curb MNC engagement in overseas corruption. More specifically, our work contributes new insights which serve to broaden the set of assumptions that can be employed by anti-corruption researchers. Transaction cost-based anti-corruption research conceptualizes corrupt acts as exchanges (Aidt
2003). Scholars have theorized that increasing the costs associated with engaging in these exchanges should reduce their prevalence (Bray
2005). As such, transaction cost researchers have identified a range of theoretically grounded strategies that should increase the costs associated with engaging in corruption. These include strategies designed to enhance monitoring, destabilize corrupt agreements and encourage betrayal among corrupt actors (Lambsdorff et al.
2005). However, assessments with respect to the efficacy of these transaction cost-grounded strategies in reducing the prevalence of MNC engagement in foreign market corruption have been mixed (Lambsdorff
2007; Rousso and Steves
2006). Heeks and Mathisen (
2012) propose that the limited effectiveness of anti-corruption initiatives can be a consequence of design-reality gaps whereby theoretical assumptions embedded within the design of anti-corruption programs fail to accurately reflect the reality of the contexts within which these initiatives are deployed. We noted that two key assumptions have frequently underpinned the strategies and policy recommendations of anti-corruption theorists. First, corruption is conceptualized as occurring primarily within a MNC’s public sector transactions with government officials and bureaucrats (Goel et al.
2015). Second, engaging a “middleperson” such as a JV partner is assumed to be a key strategy employed by MNCs to manage both the transactional uncertainty precipitated by more pronounced government corruption and the heightened transaction costs instigated by global anti-corruption efforts (Bray
2005; Drugov et al.
2014). However, these assumptions constitute important sources of potential misalignment between the design of an anti-corruption program and the context within which the program is deployed (Hansen
2011; Persson et al.
2013).
Our conceptual work and research findings suggest that policy prescriptions designed to curb MNC engagement in overseas corruption must consider both the multidimensional nature of the construct and the distinct strategic responses of MNCs to different types of corruption to ensure that anti-corruption programs are properly calibrated. As such, the insights that emanate from our work contribute to the ethics-based anti-corruption research agenda which has advocated in favor of “subscribing to a wider view of the definition of corruption” and developing “a more comprehensive understanding of how corruption impacts business” (Bishara and Schipani
2009, p. 766). Given the global pervasiveness of both private and public corruption, some researchers have recognized the importance of deterring both types of corruption (Goel et al.
2015; Rose-Ackerman
2010; Weismann et al.
2014). Our findings that public and private corruption each exert a distinct impact upon the structural decisions and partnering choices of MNCs suggest the need for increasingly multifaceted anti-corruption and corporate governance initiatives. In doing so, we bolster efforts to reduce the prevalence of design-reality gaps that threaten to undermine the efficacy of anti-corruption programs. In turn, our work serves to enhance the potential for scholars, policy makers and managers to curtail MNC engagement in overseas corruption. Further, improving our understanding of how MNCs respond to distinct types of corruption in foreign markets is ultimately intertwined with ongoing efforts to foster more responsible MNC leaders (Siegel
2014) whose actions can make a positive contribution to the achievement of the UN’s full suite of sustainable development objectives.
Limitations and Future Directions
Notwithstanding our contributions, some limitations do exist. A first limitation is the use of a sample of firms from a single home country. While scholars have argued that this approach can be beneficial because it minimizes the impact of differences between multiple home countries upon the dependent variable (Coeurderoy and Murray
2008), future research should consider opportunities to verify our results with a sample of non-Japanese MNCs. Second, while our study is one of the first to employ the new measure of private corruption that has been developed by Gutmann and Lucas (
2018), the geographic and temporal coverage of the measure’s underlying data is still limited. As one example, private corruption data for our study period was not available for several countries including China, notwithstanding China’s prominence as a global destination for FDI (World Investment Report
2017). Moreover, after 2007, the GCB surveys have been executed more intermittently, rather than on a regular annual basis.
Despite these limitations, the patterns that emerge from our research open new avenues for future scholarship. Different types of corruption have been found to exert distinct impacts upon the structure of a MNC’s foreign subsidiaries. To extend our work, researchers should explore the effects of public and private corruption upon other decisions facing the MNC such as its expatriate assignment and asset deployment strategies. Additionally, the corporate social performance implications associated with adopting different organizational structures in more corrupt host market environments should also be investigated, with particular attention being given to the contingent effects associated with the distinct components of corruption that we have studied. Each of these lines of research inquiry holds the potential to augment the efforts of anti-corruption researchers, policy makers, MNCs and managers to address the pernicious challenge of overseas corruption.
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