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The effectiveness of laws against bribery abroad

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Abstract

This paper analyzes the effectiveness of laws against bribery abroad in inducing foreign investors to reduce their investments in corrupt countries. The laws are designed to reduce the supply of bribes by foreign investors by increasing the costs of bribing abroad. Such increase in costs will make foreign investors more sensitive to corruption, and induce them to reduce their investments in corrupt countries. However, the paper argues that these laws need to be implemented and coordinated in multiple countries to become effective. Otherwise, investors in a country will have incentives to bypass them when competitors from other countries are not bound by similar legal constrains. The empirical analysis shows that investors from countries that implemented the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions of 1997 reduced their investments in corrupt countries. Investors from the US, which were bound by the Foreign Corrupt Practices Act of 1977, also reduced investments in corrupt countries, but only after the OECD Anti-Bribery Convention was in place.

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Notes

  1. In addition to increasing the costs and risks of corruption, there are other alternatives to reduce corruption, such as reducing government intervention and discretion, increasing competition, reducing incentives for bribes, improving transparency in government activities, and government decentralization (Ades & Di Tella, 1997, 1999; Fisman & Gatti, 2002; Rose-Ackerman, 1999; Shleifer & Vishny, 1993). I do not discuss these in the paper.

  2. The legislative history appears in US Congress (1977) and US Senate (1977), and is summarized in Hines (1995) and Seitzinger (1999).

  3. In the US, the FCPA was altered in 1998 by the International Anti-Bribery and Fair Competition Act of 1998 (US Congress, 1998) to bring it in line with the OECD Anti-Bribery Convention. Among the changes was the redefinition of “foreign official” to include officials of public international organizations, and the application of the Act to all issuers of securities in the US and not only US ones. For a history of this legislation see Larson (1997) and US Department of Justice (1998).

  4. Not all the economies listed are independent countries (e.g., Hong Kong). I nevertheless treat them as independent sources or destinations of FDI. Additionally, data for Belgium and Luxembourg appear together in the UNCTAD reports. I use them as one single source or destination. The host economies for which I have FDI data are: Algeria, Angola, Argentina, Armenia, Australia, Austria, Azerbaijan, Bahamas, Barbados, Belgium/Luxembourg, Belize, Benin, Bermuda, Bolivia, Brazil, Brunei, Bulgaria, Burkina Faso, Burundi, Cambodia, Cameroon, Canada, Cape Verde, Central African Republic, Chad, Chile, Colombia, Comoros, Costa Rica, Cuba, Czech Republic, Denmark, Djibouti, Dominican Republic, Ecuador, El Salvador, Eritrea, Estonia, Ethiopia, Finland, France, Gambia, Germany, Greece, Guatemala, Guyana, Haiti, Honduras, Hungary, Iceland, Ireland, Italy, Jamaica, Japan, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Macau, Macedonia, Malawi, Mali, Mauritius, Mexico, Moldova, Mongolia, Morocco, Mozambique, Myanmar, Netherlands, New Zealand, Nicaragua, Norway, Panama, Paraguay, Peru, Poland, Portugal, Russia, Rwanda, Saint Kitts and Nevis, Saint Lucia, Sierra Leone, Slovakia, Slovenia, Somalia, South Korea, Spain, Suriname, Sweden, Switzerland, Tanzania, Trinidad and Tobago, Tunisia, Turkey, Uganda, UK, Uruguay, USA, Uzbekistan, Venezuela, Zambia, and Zimbabwe.

  5. I have a cross-sectional panel of seven years of investment relationships between home country i and host country j. The problems of serial correlation will appear at the home-host country dyad, especially in the interaction between the indicator that the home country has laws against bribery abroad and the indicator of host country corruption. This interaction will start taking values above zero once the laws are in place, and will continue with similar values in years after the laws are passed because the level of corruption in the host country changes little from year to year. Therefore in the models I will control for problems in the error term in the home–host dyad.

  6. I thank an anonymous referee for suggesting this paper.

  7. I use a random effect panel model to be able to compute the effects of the controls, many of which are time invariant, and to correct for time-variant shocks that affect investors from a home country to a host country. This is the approach taken by Bertrand et al. (2004).

  8. I cannot run the model where I ignore the time series information because the FCPA was in place throughout the period of analysis. Therefore there is no before and after period where I can compare the effect of the FCPA on the residuals from the regression of the controls on FDI inflows. However, I do run this analysis when analyzing the behavior of US investors once the OECD Anti-Bribery Convention was in place.

  9. In this analysis I cannot compare US investments before and after 1998 in the same equation because they are mutually exclusive categories that become collinear in the analysis. As I explained before, the residual analysis takes data only from the country with the treatment. Hence we can run only one indicator at a time. If instead of running the model with US investments after 1998 on the residuals we run the model with US investments before 1998 on the residuals, the coefficient is positive and statistically significant. US investors were not further deterred by host country corruption before the OECD Anti-Bribery Convention.

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Acknowledgements

I thank anonymous referees, the Special Issue Editor Witold Henisz, Kendall Roth, and participants at the Academy of International Business annual meeting for useful suggestions, and the Center for International Business Research and Education at the University of South Carolina for financial support. All errors are mine.

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  1. Sonoco International Business Department, Moore School of Business, University of South Carolina, Columbia, USA

    Alvaro Cuervo-Cazurra

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Correspondence to Alvaro Cuervo-Cazurra.

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Accepted by Anand Swaminathan, Special Issue Editor and Witold Henisz, Special Issue Editor and Departmental Editor, 31 August 2007. This paper has been with the author for two revisions.

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Cuervo-Cazurra, A. The effectiveness of laws against bribery abroad. J Int Bus Stud 39, 634–651 (2008). https://doi.org/10.1057/palgrave.jibs.8400372

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