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Javier Perez, EMI Research Director

Javier Perez, EMI Research Director

Feb 11 2014

Corruption, Part 1: Bribery by Asian and Chinese Firms

By Javier Perez, EMI Research Director

Many emerging markets in Asia experience above average levels of corruption. This review examines the recent literature on Corruption in Asia which, together with the survey data they cite and analyze, provide some answers to some important questions: How corrupt are business practices in Asia? How pervasive is bribery of public servants by corporations?  How large a tax does corruption impose on business?  What compels or motivates some firms in some markets to engage in bribery?  Is Chinese businesses culture, with its emphasis on guangxi, more tolerant of corruption?

 

How corrupt is emerging Asia?

 

The latest Corruption Perception Index[1] by Transparency International provides interesting data on just how corrupt emerging Asia really is (Table 1). Singapore and Hong Kong rank among the least corrupt countries in the world, scoring better than the USA.  Taiwan, Korea and Malaysia have corruption levels not very different from those reported for Portugal and Spain. China’s corruption index at 40 is quite close to that of Italy’s 43 and both countries rank close to the median of the 176 countries surveyed.  India, The Philippines, Thailand, Indonesia and Pakistan rank progressively worse than China.  Myanmar, Cambodia, Afghanistan and North Korea are some of the most corrupt economies in the world.

 

Comparing 2013 corruption rankings to those reported for 2007 reveals that emerging Asian country corruption rankings - and perhaps their level of corruption itself - have not changed much with all but a few exceptions (Table 1).

 

How pervasive is bribery? How large a tax is corruption?

 

The landmark World Business Environment survey (WBES) conducted by The World Bank over a period spanning from 1998 to mid 2000 and covering more than 10,000 companies in 83 countries provides some quantification of corrupt practices.

 

Xun Wu, whose article Determinants of Bribery in Asian Firms: Evidence from the World Business Environment Survey (1) we review below, provides some highlights from the WBES.  Bribery is common, 54% percent of firms surveyed reported paying bribes regularly and only 17% reported never paying bribes.  Bribery is reliable, 77% of firms engaging in bribery report that the services paid for were delivered as agreed.  Bribery is sometimes optional, 53% of firms report that it is sometimes or even regularly possible to seek and work with a non-corrupt official. 

 

The reported incidence of bribery varies greatly by country and is roughly proportionate to reported perceptions of corruption. Only 2% of firms in Singapore report bribing frequently compared to 70% of firms in Pakistan and 79% of firms in Thailand. 

 

Corruption represents a staggering tax on business, with nearly half of firms engaging in bribery reporting annual bribery payments of 2-25%. Curiously, the Philippines and Bangladesh, two countries where corruption is highly prevalent, have rather benign payment amounts: 73% and 65% of respondents respondents from those countries respectively report bribery amounts of 2% or less.

 

 

What compels or motivates some firms in some markets to engage in corruption?

 

 

The WBES, along with the bank’s subsequent  Investment Climate Surveys (ICS), has enabled academic researchers to conduct statistical analysis aiming to identify what determines corruption.

 

In Determinants of Bribery in Asian Firms: Evidence from the World Business Environment Survey (1) Wu used the first of these surveys to identify a number of causes that are both intuitive and predicted by theory and a few that he describes as surprising[2].

 

Predictably, the prevalence of business regulation such as licensing requirements, lack of transparency in interpreting laws and regulations, the inefficient delivery of government services and high taxes are all associated with higher propensity to bribe and with higher incidence of bribery. Xu also found that smaller firms and those controlled by family firms are more likely to pay bribes consistent with the view that less powerful firms may bribe out of necessity and that lower corporate governance standards may facilitate if not encourage bribery.

 

Wu’s work does contain some findings that are not consistent with theoretical predictions and, in some cases, with other empirical work.  Higher levels of market competition may increase the level of bribery “if a bidding war for desired services intensifies”. This is contrary to the view that deregulation should reduce bribery by reducing the ability of corrupt officials to extract rents.  High growth firms pay a lower proportion of revenues in bribes which Wu speculates may be due to these firms having more leverage over officials and which appears to contradict the “ability to pay” hypothesis.  The adoption and conformity to international accounting standards does not directly contribute to the reduction of bribery (presumably if not coincident with higher corporate governance standards).

 

In Firm Networking and Bribery in China: Assessing Some Potential Negative Consequences of Firm Openness (2) Huang and Rice use ICS data gathered in 2003 (and published in 2006) on 2,400 Chinese firms across 18 Chinese cities to examine the effect of greater economic openness on bribery in China. Like Wu, Huang and Rice find that greater transparency in interpreting rules and better government services lead to lower propensity to bribe.  Huang and Rice also found that higher levels of networking among Chinese firms is strongly correlated with greater propensity toward paying bribes, and that there is a strong positive link between an individual firm’s level of networking and the amount of bribe payments involved.

 

The authors speculate that erosion of competitive advantage brought about by more effective information dissemination, “over-emphasis on market oriented values”, and suspicion (or knowledge?) that competitors may benefit from corruption may all play a role in the link between greater openness, networking and corruption. Finally their findings suggest that the participation of foreign competitors in China may have resulted in the payment of larger bribes by domestic firms (presumably finding themselves at a competitive disadvantage).

 

In Government Intervention, Perceived Benefit, and Bribery of Firms in Transitional China (3), Gao reports findings from a survey of about 500 MBA students at universities in Shanghai, Guangzhou and Wuhan. While limited in scope and indirect in method, Gao’s work is worth citing because it confirms that the level of government intervention is positively correlated with bribery by Chinese firms and refines this view by providing evidence that bribery takes place primarily when government intervention creates rents. In his words: “perceived benefit has a full mediating effect on the relationship between government intervention and firm’s bribery.” Taken at face value, this research appears to suggest that firms in China engaging in   bribery are rational actors seeking to profit from their actions and not necessarily hapless victims of a corrupt system.

 

What is the link between guanxi and corruption?

 

A surprisingly large  body of academic research, both empirical and theoretical, seeks to study corruption in the context of the cultural norms. This is particularly true of the study of the link between corruption and guanxi which has received a significant amount of attention by academic researchers studying corruption in China and in Asia (where companies owned by ethnic Chinese constitute a large and influential segment of the business community). 

 

In the article by Huang and Rice summarized above (2), the authors provide an extensive review of prior research on guanxi, which they define by citation to mean “coalitional relationships based on resource exchanges[3]. Not quite equivalent to the western notion of networks, guanxi      derives from the long established Confucian heritage which draws on the underlying moral principles of hierarchy, interdependence and reciprocity[4]. While their empirical work on bribery can and does stand on its own, they attempt to explain their findings in the context of the “use” and “misuse” of guanxi in the face of challenges brought about China’s opening-up policy. They identify the “misuse” of guanxi as an active strategy to use bribery to countermand increased competition and the “use” of guanxi as a passive defense that resorts to bribery in order to overcome weak institutional support. They also identify “The intermediary, (as) an essential agent in cultivating guanxi connections, that may inadvertently (or perhaps deliberately) cause the deterioration of ethical behavior...

 

Just as Huang and Rice attempt to distinguish between the “use” and “abuse” of guanxi, in Guanxi-Building in the Workplace: A Dynamic Process Model of Working and Backdoor Guanxi Bedford (4) attempts to refute prior academic research that views all “business guanxi” as “being purely utilitarian in nature and conducted mainly with strangers through intermediaries, with little trust or commitment in the relationship.”  Instead Bedford proposes two types of guanxi: “working guanxi” which is “the process of exchange of favors related to workplace goals”; and “backdoor guanxi” which is the process of negotiating business solutions...that includes personal gain for at least one of the parties involved.” Bedford associates corruption with the later but not with the former form of guanxi.

 

Much of the research on guanxi is focused on examining perceptions of corruption among business people in Asia (and in other emerging markets). In Guanxi and Business Ethics in Confucian Society Today: An Empirical Case Study in Taiwan Hwang et al. (5) report that in a survey they conducted reveals that managers in Taiwan feel that guanxi has been abused (as evidenced by high profile corruption scandals) and that guanxi is a source of corruption in Taiwan.

 

In Consideration of the Role of Guanxi in the Ethical Judgements of Chinese Managers Ho and Redfern (6) report on the responses of managers at Hong Kong Bank to a series of  vignettes describing the use of guanxi. They found that most managers applied moral reasoning based on principles of upholding the law and social norms, and not principles based on obedience or reciprocity. 

 

In Perception of Business Bribery in China: the Impact of Moral Philosophy Tian (7) examines the perceptions of bribery by managers in China based on their moral philosophy and finds that while most managers espoused Confucian values, those who espoused moral relativist views (associated by Tian with Taoist moral philosophy) tended to to view bribery more favorably.

 

Finally, in A Stakeholder Approach to the Ethicality of BRIC firm managers use of Favors McCarthy et al. (8) propose that manager across all the BRIC countries view the use of favors as ethical and bribery as unethical. They attribute the use of favors as being “ based on cultural-cognitive institutions that fill the void created by the weak legitimacy of formal institutions in these countries. This article also provides an interesting description of guanxi and its equivalent in Brazil (jeito), Russia (blat and sviazi) and India (jean-pehchaan).

 

While somewhat arcane and, perhaps, of limited practical value, this research does provide some interesting perspectives of the link between cultural norms and corruption in Chinese societies. Taken together, they suggest that businesspeople in countries where guanxi is practiced have no trouble distinguishing between acceptable reciprocity and ritualized gift giving on the one hand and corruption on the other.

 

                                                *        *        *

Bibliography

1.    Wu, Xun. Determinants of Bribery in Asian Firms: Evidence from the World Business Environment Survey. Journal of Business Ethics 87(1), 2009.

2.    Fang Huang, John Rice. Firm Networking and Bribery in China: Assessing Some Potential Negative Consequences of Firm Openness. Journal of Business Ethics  June 2012, Volume 107, Issue 4, pp 533-545

3.    Yongqiang Gao. Government Intervention, Perceived Benefit, and Bribery of Firms in Transitional China. Journal of Business Ethics December 2011, Volume 104, Issue 2, pp 175-184

4.    Olwen Bedford. Guanxi-Building in the Workplace: A Dynamic Process Model of Working and Backdoor Guanxi. Journal of Business Ethics November 2011, Volume 104, Issue 1, pp 149-158

5.    Dennis Hwang, Patricia Golemon, Yan Chen, Teng-Shih Wang, Wen-Shai Hung. Guanxi and Business Ethics in Confucian Society Today: An Empirical Case Study in Taiwan. Journal of Business Ethics Volume 89, Issue 2, pp 235-250

6.    Cynthia Ho, Kylie A. Redfern. Consideration of the Role of Guanxi in the Ethical Judgements of Chinese Managers. Journal of Business Ethics October 2010, Volume 96, Issue 2, pp 207-221

7.    Qing Tan. Perception of Business Bribery in China: the Impact of Moral Philosophy. Journal of Business Ethics July 2008, Volume 80, Issue 3, pp 437-445

8.    Daniel J. McCarthy, Sheila M. Puffer, Denise R. Dunlap, Alfred M. Jaeger. A Stakeholder Approach to the Ethicality of BRIC firm manager’s use of Favors. Journal of Business Ethics November 2012, Volume 42, No. 4, 3 pages



[1] The Corruption Perception Index, an annual survey from the NGO Transparency International provides data ranking and scoring levels of corruption across the world (176 countries and territories). Archival data dating to 2001 also provide a glimpse at how corruption has changed over time.

2. While Wu’s work relies on data gathered more than 10 years ago and published in 2008 may seem dated, it continues to be relevant as a comparison of Corruption Perception Indices for 2013 and 2007 suggests that the perception of corruption (and perhaps corruption itself) changes very gradually (Table 1). It is also worth noting that Wu and other researchers recognize under-reporting and other biases inherent in use analytical methods designed to correct for them.

5 Suet at al. 2007. Also: “tight close-knit networks” Yeung and Tung 1996; “long term cooperation among business partners” Su et al. 2003.

[4] Huang 1987


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