How can anti-corruption regulations promote social responsibility?

International anti-corruption initiatives focus on the “supply” side of the bribes (the bribe-giver), and not looking at the “demand” (the bribe-receiver). Image: Shutterstock

To promote ethical and socially responsible behavior, companies need to be held accountable. One way of encouraging good behavior is through the use of laws and regulations- but what if it’s not so simple?

Srividya Jandhyala (ESSEC Business School) and Fernando S. Oliveria (The University of Auckland Business School) examined the impact of international anti-corruption rules, finding that in certain conditions, such rules actually increased the likelihood of domestic firms engaging in bribery, as they are not subject to the same penalties as the multinational firms.

Do anti-corruption efforts really work?

It’s been hard to avoid coverage of major bribery scandals over the last few years, with companies paying millions of dollars in bribes across the globe, particularly to land lucrative contracts with foreign governments. As a result, governments like Germany and the USA have put legislation in place to reduce bribery, with heavy fines in place for the violators.

A distinctive feature of the new generation of anti-corruption laws and regulations is to hold firms accountable in domestic courts for their behavior abroad. For instance, American firms can be investigated for bribes in a far-away country, even if their behavior broke no laws in the foreign country.

While this impacts firm behavior across markets, it’s less clear how effective these laws are in reducing corruption in foreign markets. While anti-corruption efforts take firms to task for their behavior abroad in their home countries, they don’t impact domestic competitors in the foreign markets. This means that the effect of the legislation is unequal, since it only touches the multinationals, leaving the domestic firms consequence-free.

Gaming the system

To explore the unequal costs of corruption on the bribing behavior of domestic and multinational firms, the researchers used game theory to make predictions based on certain assumptions. They built a model with N number of firms competing for a portfolio of projects, and deciding whether or not to offer a bribe. In this model, firms were aware of the potential costs (and benefits) of their own bribing decisions, but not the payoffs or strategic decisions made by other firms - only the average level of bribing occurring in the industry.

This model represents the project bidding process that occurs in many countries. Firms make a strategic choice to offer a bribe, since they think if they don’t, their rival will, and will subsequently win the project.

They found that under some conditions, multinational firms decrease their bribing due to increased monitoring and sanctions, but domestic firms increase their own bribes. The heavier the sanctions, the less likely the multinational firms are to offer bribes. This does mean that bribing in the industry as a whole decreases. However, it also means that the domestic firms see this as an opportunity, and take advantage of it.

Why do they do it? The study indicates that when bribing probability is higher, the profit they expect is also higher, so they think bribery is more likely to be profitable. Conversely, when bribing is seen as more costly - with heavier penalties - bribing probability goes down. This highlights the use of bribery as a strategy: firms consider the landscape before engaging in it.

Are multinational firms different in how they react? The researchers also looked at the impact of productivity loss on bribing. Some multinational firms lack experience in a local environment, don’t have local roots, are less familiar with local politicians and regulators, and have lower awareness of local norms. For these firms, the cost of bribing is even higher as they have to repurpose productive resources towards figuring out “how” to bribe.

On the other hand, experienced multinational firms won’t face such challenges, and thus will experience lower productivity costs and higher likelihood of bribing under a given monitoring and enforcement regime.

Also read: Corporate fraud: Just how prevalent is it?

What does this mean for anti-corruption practices?

Taken together, the results from this modeling suggest that anti-corruption legislation can lead to unequal competition. Domestic firms actually became more likely to bribe when the multinational firms face more oversight and heavier sanctions, even if overall bribery rates in the industry decline. This has three implications.

One implication is that international anti-corruption initiatives may not be enough to curb bribery if they do not cover all competitors: the costs of punishment, profit, and government policy generates different incentives for different firms. Policies should also cover the context locally to create a more even playing field.

Another consideration is who to penalize for bribery. International anti-corruption initiatives focus on the “supply” side of the bribes (the bribe-giver), and not looking at the “demand” (the bribe-receiver). So, only half of the puzzle is addressed.

Another is the finding that when the benefits of bribing are more reliable, domestic firms are more likely to do so. It could be useful to create a network of local officials when granting projects: if several agencies are involved, bribing only one person may not seal the deal, and bribing all actors involves heavier costs.

Overall, while initiatives to tackle corruption are laudable, the results aren’t quite as clear-cut as policy-makers may hope, suggesting that future policies and research should also investigate the market and institutional context to have more consistent positive outcomes.
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Srividya Jandhyala is an Associate Professor of Management at ESSEC Business School Asia-Pacific.

This article was adapted from ESSEC Knowledge.