“Indeed, each day it seems that new revelations of corrupt practices in the business world hit the headlines. It is almost as if an inversion has taken place and we now expect corruption to be a part of every day corporate life, and are rather surprised if it does not feature somewhere in the business model of large global-spanning corporations” (Fleming & Zyglidopoulos, 2009, p. vii).
Undoubtly, corruption has become a hot topic. Although corruption as a phenomenon existed at least two thousand years ago (Tanzi, 1998), the focus of researchers and policy makers has traditionally been government officials who thus illegally gain advantage. However, as Fleming and Zyglidopoulos (2009) point out, corruption is also an issue in business.
Corruption may be within the private sector itself, or in the interaction between business and the public sector. This thesis seeks to examine the risk of financial distress when facing government corruption.
Bribes can be offered or extracted, and is one of the main forms of corruption in interactions with the public sector (The World Bank, 1997). Some firms bribe to get goods through customs, others to get building permits illegally or more rapidly. Corruption, with its several forms, can occur in a big or small scale and is a complex phenomenon that can have numerous and severe consequences. Even nonmonetary or small transactions, or gestures, can accumulate to great amounts and affect business profitability. This makes understanding the concepts and consequences of corruption important to investors, boards, managers and employees from an economic perspective (leaving aside its issue of morality). Corruption can be an integral part of the daily challenges for a firm in many countries. Even companies that are not involved may feel the need to strategize around it. For example, in the precense of corruption, some foreign firms may consider working with local entities instead of entering the market itself or dealing with local governments (Garviria, 2002).
With the increased focus on corruption, several institutions and non-governmental organizations have made it their intention to fight it. Several key laws and regulations have been put in place to fight and reduce corruption. As Bishop & Hydoski (2009) states,
“tolerance of bribery as an accepted business practice is diminishing rapidly as more countries acknowledge the tremendous downside risks of corruption and the fraud that always almost
[sic] accompanies it”. However, due to its hidden nature, corruption will most likely always be a part of the business environment.
Research on corruption in business-government interactions distinguishes between administrative corruption and state capture. This thesis will mainly focus on the first, from a business perspective, when examining:
“When do enterprises suffer from business corruption? Furthermore, under which conditions are they willing to participate by paying bribes?”
Keeping in mind that corruption involves more than bribery, a three-way approach is used to discover the common features. First, I briefly discuss how a firm might suffer from corruption.
Thereafter, I look at some of the theories that drive businesses to engage in corrupt acts.
Having surveyed theory and previous research, I use data available in the Business Environment and Enterprise Performance Survey (BEEPS). To test empirically the different circumstances in which firms risk being constrained by business corruption. Thereafter I look at the circumstances in which they pay bribes.
1.1 Empirical base: BEEPS
According to the Corruption Perception Index by Transparency International, nowhere on earth is free of corruption (Gander, 2015). BEEPS is a firm-level survey collected through a joint initiative by the World Bank Group (WBG) and the European Bank for Reconstruction and Development (EBRD), covering countries in Eastern Europe and Central Asia. It provides data for local firms in 2009 and 2013, which will form the basis of my analysis. As corruption differs between geographical areas, this region is particularly interesting. Corruption has been prevalent in many transition economies, preventing economic growth and privatzation of
enterprises. Following the organizational framework of the United Nations Statistics Division (UNSD) (United Nations Statistics Division, 2015), the 28 countries are divided into sub-regions as follows:
Table 1.1 Countries divided into regions Eastern Europe Northern Europe
(Baltics)
Southern Europe Western Asia (Caucasus)
Central Asia
Belarus Estonia Albania Armenia Kazakhstan
Bulgaria Latvia Croatia Azerbaijan Kyrgyzstan
Czech Republic Lithuania Montenegro Georgia Tajikistan
Hungary Serbia Uzbekistan industries surveyed in the data set: 1) Manufacturing; 2) Construction; 3) Wholesale and retail trade; 4) Hotels and restaurants; 5) Transport, storage and communications; and 6) Real estate, renting and business activities.
1.2 Previous research
The study of corruption differs from geographical area, and whether you look at the origin of corruption from the demand side or the supply side. The field of research is dominated by empirical research rather than theories. Some literature uses the Enterprise Surveys, and even the BEEPS Survey in their empirical literature. The data is often used to examine other aspects of the business environment, such as innovation. Specific countries are examined in addition to regions such as Latin America, Africa, or Eastern Europe and Central Asia). Results depend
1 Kosovo is included in Southern Europe as it was formerly a part of Serbia. Since the thesis focuses on 2009 and 2013, all
the three countries borne of Serbia and Montenegro are included in the thesis. Although Kosovo is not acknowledged as an independent state in some countries, it is analyzed on its own and denoted “Kosovo” in The Enterprise Surveys.
on the angle of the author and the year they study. To my knowledge, except reports from the World Bank, no published research is done on corruption and bribery for the BEEPS Survey for 2013 and for both 2009 and 2013. Research in total lack a view of industrial differences.
1.3 Structure of the thesis
This thesis is organized as follows. Section 2 presents definitions and clarifications of terminology within corruption. Section 3 explores how corruption can constrain or affect a business and its environment. Section 4 explores some of the reasons for involvement in corruption. Section 5 presents the empirical base, The BEEPS Survey. Section 6 explains the construction of the data set and the removal of some variables. Sections 7 and 8 present corruption and bribery in the relevant countries and industries respectively. Thereafter, the methodology of the empirical analysis is presented in Section 9, followed by a discussion of our variables of interest in Section 10. Sections 11, 12 and 13 present the descriptive analysis, findings and concluding remarks. Finally, limitations and criticisms of the research are considered in Section 14.