Even morally upright people often succumb to retail corruption. You may have had a long disdain for petty bribing and prefer to pay the fine than try to get out of a penalty for speeding. But after repeated visits to a tehsildar’s office, your confidence shaken that you will ever have all the documents in the right order to please that low level clerk, you may cringe and decide to approach the tout who will have everything done while you have your tea in the corner shop. For a fee.
Businesses have an amoral view towards bribery and tend to treat bribes as a cost of doing business. Many western governments till recently even allowed it as a deduction on their tax returns. Standard international business advice is that a company needs to adapt to the practices of the host country when it comes to foreign investments. Is that valid when the company invests in a country known for corruption? A recent article in the Journal of International Business Studies (53:2022) by Jia et al. offers some clues.
The US’ Foreign Corrupt Practices Act imposes penalty on firms who make bribery payments overseas for business purposes. Although enacted in 1977, vigorous enforcement really picked up after about 2015. This has proven to be a challenge for multinational enterprises who follow the rules of their home country and also try to conform to host country practices. It poses a problem when these come into conflict.
The paper analyses FCPA enforcement data over a 34-year period. The authors found that in countries where a US company has been subjected to investigation and penalty, it acts as a deterrent for further investments. Other US MNEs would begin wondering if they are going to be investigated. Valid fears, for if the enforcement agency finds wrongdoing by one company, it then begins wondering if other US firms are up to mischief in the same country. The good news, though, is that the study did not find evidence of relocation of the investment. So the company stays but does not increase its investment.
What lessons do we take from these findings? The results support US objectives of making sure their companies behave around the world. What about the host country? No country would want a reputation for having a corrupt business environment, which follows from weak institutional structures of enforcement. Ministers may love the talk of wanting a clean environment but enjoy the ‘commissions’ they skim off the top. They should realise that FDI is going to be affected and so their commissions are going to drop over time. After all, the US enforcement agency is not going after the odd company that is bribing officials in an otherwise clean country. They would be focusing on companies in countries where corruption is known to be widespread.
The US experience
The study also supports the argument made by US companies that the FCPA puts them at a competitive disadvantage vis-a-vis other countries that don’t enforce such rules against their companies. Over time and prodded by the US, other advanced economies have also been passing their versions of the FCPA.
For many countries climbing up the rankings of World Bank’s ‘Ease of Doing Business’ was an incentive to clean up their act and fix obvious problems that were a deterrent to foreign investors. But in a pique, the Bank has dropped the measure. We hope research studies like the one discussed here will be a good substitute to motivate governments that they cannot stick merely to tax incentives and public relations if they want to encourage foreign direct investments.
The writer is an emeritus professor at Suffolk University, Boston