WHY DO PEOPLE BRIBE AND IS IT WORTH IT? A MIXED METHODS STUDY OF BRIBING ANTECEDENTS AND OUTCOMES IN FORMER SOVIET COUNTRIES
by
CARL H. GREPPIN
Submitted in partial fulfillment of the requirements for the degree of
Doctor of Philosophy
Weatherhead School of Management
Designing Sustainable Systems
CASE WESTERN RESERVE UNIVERSITY
May, 2020
CASE WESTERN RESERVE UNIVERSITY
SCHOOL OF GRADUATE STUDIES
We hereby approve the dissertation of
Carl H. Greppin
candidate for the degree of Doctor of Philosophy*.
Committee Chair
Kalle Lyytinen, Ph.D., Case Western Reserve University
Committee Member
Richard Boland, Ph.D., Case Western Reserve University
Committee Member
Pete Moore, Ph.D., Case Western Reserve University
Committee Member
Nnaoke Ufere, Ph.D., Case Western Reserve University
Committee Member
Yunmei Wang, Ph.D., Case Western Reserve University
Date of Defense
January 16, 2020
*We also certify that written approval has been obtained
for any proprietary material contained therein.
© Copyright by Carl Greppin, 2020
All rights reserved.
Dedication
Dedicated to my late father who would have been happy, having received a PhD himself, that I completed this degree. And to my mother, who was my first teacher and edited decades of my papers - from primary school until this study.
In gratitude to my wife Elizabeth and our children, Katie and Chase, for encouraging me to finish this program. “Dad, we don’t quit when things get difficult”, inspired me.
Table of Contents
List of Tables ...... vii List of Figures ...... viii Abstract ...... x Chapter 1: Introduction, Problem of Practice and Research Question ...... 1 Introduction ...... 1 Problem of Practice and Research Question ...... 2 Chapter 2: Literature Review ...... 5 Background on Corruption ...... 5 Cultural Factors Influencing Performance ...... 12 Strategic Decision Making ...... 14 Motivation ...... 17 Theoretical Framing ...... 18 What Is Empirically Known of Antecedents of Executive Corrupt Behaviors ...... 24 Research Motivation and Goals ...... 27 Research Design...... 33 Chapter 3: How U.S. Executive Expatriates Work in Environments of Pervasive Corruption ...... 35 Introduction ...... 35 Method ...... 36 Findings...... 38 Discussion ...... 46 Summary of Qualitative Study...... 50 Chapter 4: Does Bribery Affect Firm Performance? The Effect of Exogenous Factors in Former Soviet Republics...... 51 Introduction ...... 51 Hypothesis Development ...... 52 Method ...... 60 Analyses ...... 64 Findings...... 69 Discussion ...... 72 Summary of Quantitative Study...... 74 Chapter 5: What Motivates Participating in Corruption and How Does Such Participation Affect Firm Performance? ...... 76 v Introduction ...... 76 Method ...... 77 Findings...... 84 Discussion ...... 102 Summary of quantitative+Qualitative Study ...... 112 Chapter 6: Discussion and Conclusions ...... 114 Integrated Findings ...... 114 Implications and Contributions ...... 122 Limitations ...... 126 Future Research ...... 130 Appendix A: Summary of Articles ...... 137 Appendix B: Interview Protocol ...... 147 Appendix C: Reasons for Zero Tolerance for Corruption ...... 149 Appendix D: Reasons for Succumbing to Extortion...... 150 Appendix E: Reasons for Pursuing Corruption ...... 151 Appendix F: Constructs Summary ...... 152 Appendix G: Pattern Matrix...... 153 Appendix H: AMOS Common Method Bias ...... 154 Appendix I: Corruption Ranking Graph ...... 155 Appendix J: Firm and Interviewee Characteristics ...... 156 Appendix K: Interview Protocol ...... 157 Appendix L: Breakout of Examples in Kyrgyzstan ...... 159 Appendix M: Breakout of Examples in Georgia ...... 160 Appendix N: Perspectives on Acting Corruptly and Not Acting Corruptly ...... 161 Appendix O: Respondent Stratification by Country and Region...... 162 Appendix P: Respondent Stratification by Category ...... 163 References ...... 164
vi List of Tables
Table 1: Social Norms ...... 22 Table 2: Corruption Ranking ...... 31 Table 3: Respondents by Country and Region ...... 37 Table 4: Findings Summary ...... 40 Table 5: Countries in Study ...... 60 Table 6: Result of Reliability, Convergent and Discriminate Validity Testing ...... 68 Table 7: Correlation Matrix ...... 69 Table 8: Hypotheses Summary ...... 71 Table 9: Comparison of Kyrgyzstan Quantitative Results and Interview Findings ...... 86 Table 10: Summary of Perspectives on Constraints in Kyrgyzstan ...... 88 Table 11: Findings and Explanations in Kyrgyzstan ...... 91 Table 12: Comparison of Georgia Quantitative Results and Interview Findings ...... 93 Table 13: Summary of Perspectives on Constraints in Georgia ...... 95 Table 14: Findings and Explanations in Georgia ...... 97 Table 15: Comparison of Quantitative Results ...... 101 Table 16: Seven Key Findings ...... 115
vii List of Figures
Figure 1: Global Corruption Index 2018 ...... 6 Figure 2: Top Ten Importers and Bottom Ten Exporters of Corruption Per Capita ...... 7 Figure 3: Fraud Triangle ...... 18 Figure 4: Theoretical Frame...... 19 Figure 5: Fourteen Former Soviet Republics ...... 29 Figure 6: Research Design ...... 34 Figure 7: Hypothesized Model with Controls ...... 52 Figure 8: GDP per Capita versus Corruption Index...... 59 Figure 9: Model with Standardized Estimates (Betas) ...... 69 Figure 10: Concurrent Embedded Design...... 78 Figure 11: Kyrgyzstan Structural Equation Model ...... 85 Figure 12: Georgia Structural Equation Model ...... 92 Figure 13: Individual, Firm, and Country Findings ...... 119
viii Acknowledgements
I gratefully thank the following people who helped me with logistics, classes, papers, exams, and this thesis:
My committee – Kalle Lyytinen, Ph.D.; Richard Boland, Ph.D.; Pete Moore,
Ph.D.; Nnaoke Ufere; Ph.D., and Yunmei Wang, Ph.D. You were incredibly helpful throughout the process with your quick responses, thoughtful suggestions, and poignant challenges. Thank you for your optimism and encouragement!
Classmates – your comradery and support structure helped me get through all the classes, papers, and exams.
Program faculty – Professors Mohan Reddy, Richard Boyatzis, Paul Salipante,
Dick Boland, Chris, Lazlo, David Aron, James Gaskin, Youngjin Yoo, Nick Berente,
Eileen Doherty-Sil, Yunmei Wang, Jagdip Singh, Phil Cola, Anthony Jack, Pete Moore,
Kalle Lyytinen, and Stephan Liozu. Your classes were inspiring and relevant.
Program directors – Sue Nartker, Marilyn Chorman, and Rochelle Muchnicki.
Thank you for all your guidance and help with administrative projects such as
Institutional Review Board applications.
Friends and family – your interest in the program kept me committed to finishing.
Interviewees – your open and honest responses to my questions provided the bases for the most interesting findings.
World Bank – thank you for granting me permission to use the Enterprise
Surveys database.
ix Why Do People Bribe and is it Worth it? A Mixed Methods Study of Bribing Antecedents and Outcomes in Former Soviet Countries
Abstract
by
CARL H. GREPPIN
Why do people bribe and is it worth it? Given the complex nature of this question,
I use in this study both quantitative and qualitative methods. Overall, the thesis comprises three separate but interrelated studies on bribing as a major element of corruption. First, in a Qualitative strand, I interview 30 U.S. executives who work in highly corrupt countries to understand the motivations of individuals for participating in corruption. I found that some executives refuse to participate in such practices, while others choose reluctantly to succumb to extortion, while some willingly participate in corruption. I illustrate costs the executives incur from making the decisions and reasons for why they make the decisions. I find that social norms play a significant role in their decisions including personal norms (individuals’ standards for behaviors and ethical beliefs), subjective norms (expectations of close others), injunctive norms (general societal expectations of behavior), and descriptive norms (what other people actually do).
Second, in a Quantitative strand, I analyze World Bank Enterprise Survey data of
2,956 firms in the former Soviet republics where bribing is prevalent to understand firm participation in bribing. Bribing activity is measured by the extent, frequency, and impact
x of providing additional payments or gifts to get things done. I use structural equation modeling to analyze the data and find that bribing activity has a significant direct positive effect on firm performance when measured by sales growth and employment growth. I conclude that firms undergo risk, effort, and expense to bribe, and they do so rationally in that they see it as a means to increase firm performance.
The third study, combining a quantitative+Qualitative strand, seeks to understand differences in corruption participation. To this end I interview local executives in
Kyrgyzstan and Georgia and conduct a country level quantitative analysis of the differences in firm performance using the same world bank data. Interview findings complement the findings from the quantitative strand and prior observations from the literature. In particular, my analysis suggests that bribing improves firm performance, supporting a “grease the wheels” hypothesis. I also note significant country differences which suggests that shaping the institutional environment and related expectations can have an impact on the level of bribing activity and its size.
Overall, these findings help understand what motivates executives and firms to behave in corrupt ways and participate in bribery. Especially, the findings provide novel insights to the nascent literature on bribing and to antecedents in former Soviet countries.
I also make recommendations to policy makers and practitioners on how to reduce bribing as one major form of corruption.
Key Words: Corruption; bribery; institutional theory; ethical theory; social norm theory; bureaucratic constraints; economic constraints; legal system effectiveness; informal competition; firm performance
xi CHAPTER 1: INTRODUCTION, PROBLEM OF PRACTICE AND RESEARCH QUESTION
Introduction
The World Bank defines corruption as the abuse of public office for personal gain
(World Bank, 2016). Transparency International, an international non-government organization that combats corruption, defines it as, “Behavior on the part of officials in the public sector…in which they improperly and unlawfully enrich themselves…by the misuse of the public power entrusted to them” (Transparency International, 2016).
Corruption can also be defined as the sale by government officials of government property for personal gain (Shleifer & Vishny, 1993). Though these definitions of corruption have different nuances, the definition of corruption used in this paper is that of
Transparency International, covering the abuse of entrusted power for private gain.
There are many forms of corruption, including bribery, collusion, embezzlement, extortion, favoritism, nepotism, and fraud (Al-Jurf, 1999; Vargas-Hernandez, 2010).
Forms of corruption are also different in different contexts and therefore isolating causes of corruption and comparing levels of corruption is difficult (Ufere, 2013). Therefore, this study focuses on bribery, defined as, “the quid pro quo exchange between local firms and government officials in which cash, favors and gifts are provided by the former to obtain illicit advantage in the allocation of state resources and services from the latter”
(Sanyal, 2005). Corruption in general and bribing in particular is widely considered to be damaging to the country and setting where it takes place (Lopez-Claros, 2014). For example, bribing creates unnecessary uncertainty, with contracts being renegotiated and property rights being unenforceable. Bribing also leads to other forms of crime, including the creation of mafias and organized crime who use bribing to infiltrate legal businesses. 1 Problem of Practice and Research Question
This thesis addresses the following problem of practice: “bribing is an endemic and enduring societal problem.” My overall research question is, “why do entrepreneurs and business owners in the former Soviet republics participate in bribing and is it worth it?” The former Soviet republics offer unique history and context to study bribing in that they gained independence as separate countries just a short time ago in 1991 (Gleason,
1997), having had planned economies until 1991 (Brown, 2014). Many of them share a history of being corrupt and hence suffering from “path dependency” (Bardhan, 2006;
David, 1985). They follow informal codes of conduct and norms in business that do not quickly change (Helmke & Levitsky, 2004), many of which promote highly corrupt behaviors (Transparency International, 2018).
To explore the research question, I use mixed method design. The study forms a sequential, explanatory mixed method study of the form Qualitative → Quantitative → quantitative+Qualitative, with two integration points (Creswell & Plano Clark, 2007;
Teddlie & Tashakkori, 2009).
The Qualitative strand focuses on individual decision-making behaviors by exploring how Western executives decide to participate in corrupt behaviors while working in corrupt settings. It addresses specifically the research question, “what motivates U.S. executive expatriates who work in environments of pervasive corruption to decide whether to participate in corruption?” Specifically, I want to examine how
American executive expatriates face difficulties upholding their ethical principles when working in a country where there exists a pervasive culture that promotes and is open to corruption.
2 To understand the reasons at the firm level for bribing, the next Quantitative strand centers on firm level performance and to what extent identified external factors affect the level of the firm’s bribing activity in the former Soviet republics. Using the firm as the unit of analysis, it addresses the research question, “in the former Soviet republics, to what extent do bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition affect bribing activity and to what extent does bribing activity affect firm performance?” Using SEM techniques, I detect to what extent bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition affect bribing activity and how it affects firm performance.
To better understand country level differences in bribing activity and to understand individual level motivations and accounts of engaging in bribing, I then conduct an embedded mixed method study comprising a quantitative+Qualitative strand.
This study accounts for the relationships between individual decision-making behaviors and firm level performance by analyzing country level differences in bribing and showing that country level bribing can change over time. It addresses specifically the following research questions: “1) What motivates local executives in Kyrgyzstan and Georgia to decide whether to participate in corruption, 2) to what extent do present bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition as perceived by the local executives influence their reasoning that shapes their participation in corrupt behaviors and, 3) how does such participation affect their firm’s performance?”. The paper examines how owners and presidents of companies in the former Soviet republics of Kyrgyzstan and Georgia do business and seeks to understand the effects of culture and enculturation in explaining the propensity to participate in
3 bribing. It analyzes in more detail how bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition shape bribing activity at the individual level and to what extent it is seen to affect the firm performance.
The remainder of this thesis is organized as follows: I start with Literature
Review. Next, I provide summaries of each of the three studies. This is followed by integrated findings, which reports both qualitative and quantitative findings. I conclude with implications and contributions, limitations, and future research.
4 CHAPTER 2: LITERATURE REVIEW
Three interrelating strands of literature: institutional theory (DiMaggio &
Powell, 2000; North, 1990; North, 1994; Oliver, 1991; Pfeffer & Salancik, 2003; Scott,
1995) social norm theory (Dong, Dulleck, & Torgler, 2009; Finney & Lesieur, 1982), and ethical theory (Ayal & Gino, 2011; Tyson, 1990) help shed light on why and how bribery is enacted and routinized by rational agents as a way of doing business. The theories help highlight and address facets of the study’s research questions: institutional theory illuminates how external constraints are likely to affect bribing activity, social norm theory and ethical theory illuminate what motivates individual executives to participate in corruption. The theories will serve as sensitizing devices for understanding why executives and firms have difficulty upholding ethical integrity when operating in corrupt settings.
Below, I review these three strands of literature. In addition, I provide an overview of costs and types of corruption, strategic decision making, and motivation; a highlighting of empirical studies on corruption relevant to the study setting; research motivation and goals summarizing gaps in literature and objectives for the study; and research design illustrating the mixed methods used in the study.
Background on Corruption
Every year, Transparency International produces a Corruption Perceptions Index, as determined by expert assessments and opinion surveys. Figure 1, below, are results for
2018 (Transparency International, 2018). Countries with high levels of corruption include the former Soviet Union Republics, Afghanistan, Iraq, Venezuela, and China. These countries, amongst others also having corruption, are included in this study.
5 Figure 1: Global Corruption Index 2018
As can be seen in Figure 1 above, highest corruption is generally in developing countries, and lowest is in wealthy developed countries. The corruption footprint of all countries comprises its domestic corruption plus corruption imported by global supply chains. Developing countries tend to export corruption to developed countries (Xiao et al., 2018). Figure 2 below shows the top ten importers and bottom ten exporters of corruption per capita.
6 Figure 2: Top Ten Importers and Bottom Ten Exporters of Corruption Per Capita
(Xiao et al., 2018: 73)
Countries are “sellers” or “buyers” of corruption since the world’s products embody employment affected by corruption (Langseth, 1999). China and India are the largest two exporters of corruption overall (Xiao et al., 2018). Less corrupt countries can encourage more corrupt countries to reduce corruption through their consumers – consumers can use the purchasing power to pressure global buyers such as Wal-Mart and
H&M to in turn pressure local governments and industries to reduce corruption. For example, after the 2013 Rena Plaza fire that killed over 1,000 Bangladeshi textile workers, many multinationals signed on to the Bangladesh Fire and Building Safety
7 Accord, which led to the inspection of over 675 factories (Transparency International,
2014).
In order to work in corrupt environments, U.S. companies sometimes resort to using intermediaries to pay bribes. In China, for example, Steven Feldman reports that,
“American companies routinely use third parties to pay bribes for them” (Feldman, 2013:
271). This is done despite the fact that U.S. companies have formal and informal ethical standards that preclude paying bribes. A U.S. executive said, “All foreign companies say they don’t pay bribes but they sell to an agent who sells it to the customer with a bribe.
[U.S] corporate headquarters does not know they do it. The company is clean.” (Feldman,
2013: 271).
Some American executives who are not successful in winning contracts in China blame corruption for their lack of success. One executive interviewed by Feldman indicated that his company was not making a profit in China because his company would not pay bribes. Another executive, whose company had lost money in China, blamed,
“…the Chinese propensity to break every rule, to pursue self-interest by any means possible.” (Feldman, 2013: 266). However, Feldman finds that some Americans commit corrupt acts themselves. According to another executive,
There is much pressure on American business in China to become like the Chinese, which means to be unethical. There is much pressure for profits. The only way to make profits, for most American companies, is to cheat on paying fees and taxes to the Chinese government. — Feldman (2013: 277).
Costs of corruption. The World Bank defines the damaging effects of corruption
(Lopez-Claros, 2014). Among other things, corruption causes economic activity to go underground where it cannot be taxed, it reduces private-sector development and
8 encourages inefficiency, and it contributes to worsening income distribution (Gupta,
Davoodi, & Alonso-Terme, 1998). Corruption reduces foreign direct investment (Wei,
2000) and increases costs of startup companies (Djankov, La Porta, Lopez-de-Silanes, &
Shleifer, 2002). Social costs of bribes are greater than bribe revenue, so there is dead weight societal loss (Shleifer & Vishny, 1993). For example, when purchasers elicit bribes, they have incentives to buy goods where there is less competition and less price transparency (Shleifer & Vishny, 1993). There can be an incentive to purchase advanced technology, where there are few competitors, rather than appropriate technology, where there are many competitors. In Mozambique, for example, a bottling company received a government grant to purchase a labeling machine. The company decided to buy a very expensive machine (advanced technology) that was not needed, because there was only one provider of this equipment and a kickback could be hidden in an over invoice. As a result, scarce societal resources were misdirected (Shleifer & Vishny, 1993).
Demand side versus supply side of corruption. It is commonly thought that bribes are elicited from bribe takers, and that bribe payers are encouraged or forced to pay bribes. Many studies explore this demand side of corruption on the corrupt officials who receive bribes, (the “bribees”). For example, Beets studied this in Understanding the demand-side issues of international corruption and illustrated correlation between factors of demand and levels of corruption (Beets, 2005). Fewer studies review the supply side on the firms that provide bribes (the “bribers”). However, it has been found that bribe payers actively pursue paying bribes (Ufere, Perelli, Boland, & Carlsson, 2012). In a qualitative empirical study of 32 Nigerian entrepreneurs and business owners, Ufere showed how Nigerian entrepreneurs were active perpetrators of bribery and used bribery
9 as a practice to draw resources from the state systems for private gain. Acting for economic reasons, the bribe payers followed intricate rules and routines and adopted
“bribery best practices” (Ufere et al., 2012: 2440)
Types of corruption. There are eight types of corruption (Vargas-Hernandez,
2010). 1) Bribery – a portion of the rent is transferred to officials in return for an action.
Benefits can be money, information, or employment. Bribery is more likely if there is lack of transparency, low risk of punishment, and an availability of people willing to pay the costs (Al-Jurf, 1999). Bribery can be paid ad hoc or as part of an ongoing relationship. 2) Collusion – subversion of the flow of information in an economic, societal, or political group, earning the receiver rent beyond normal profits. Individuals can avoid official regulations (such as safety conditions) by paying bribes, and consumers suffer an externality (such as an unperceived drop in safety). 3) Embezzlement and theft
– taking money or property for personal benefit (such as when subcontractors pay overseers to let them perform below specified work). 4) Fraud – using misleading information to have someone voluntarily provide over compensation (such as when selling used equipment). 5) Extortion – forcing consumers of services to pay bribes in addition to the official price. Extortion is frequently small scale (such as when travelers have to pay a bribe to pass a security checkpoint). 6) Abuse of discretion – capturing rent through abuse of power. For example, politicians exploit natural resources and undermine economic development and the social rights of citizens. 7) Favoritism, nepotism, cronyism – involving abuse of discretion, not through self-interest but through affiliations such as advancing the interest of a family of a political party. 8) Improper political
10 contributions – payments made to influence activities by members of a party while they are in office.
United States Foreign Corrupt Practices Act. The United States Foreign Corrupt
Practices Act (FCPA) of 1977 was created “for the purpose of making it unlawful …to make payments to foreign government officials to assist in obtaining or retaining business” (United States Department of Justice, 2016). The act’s anti-bribery provisions prohibit payments of money or anything of value to any person, while knowing that the money or thing of value will be given, directly or indirectly, to foreign officials to influence their capacity.
The FCPA is relevant to this study because many U.S. executives working overseas are tempted to violate it. Violating the act is not only ethically wrong, but it puts the individual at risk of being fined and jailed, getting fired, receiving reputational harm, and having trouble finding future employment. It puts the individual’s company at risk of being tried for civil or criminal offence, receiving reputational risk, and being disbarred from working with the U.S. government (Mark, 2012).
There are both criminal and civil penalties for FCPA violations. Criminal mandated penalties comprise fines up to $2 million for firms and fines up to $100,000 and imprisonment up to 5 years for individuals. Civil mandated penalties comprise disgorgement of financial gains and fines up to $500,000 for firms and $100,000 to individuals. Individual fines cannot be paid by the firm (Trautman & Altenbaumer-Price,
2011). In 2010, the Department of Justice and Securities and Exchange Commission imposed $1.8 billion in FCPA penalties, disgorgement, and interest. In 2011, the total was $509 million (Mark, 2012).
11 A study of 6,857 Compustat-listed firms that have foreign sales from 1975 until
2010 found that 1,567 of the firms had provided bribes and that 108 of the firms were caught. The mean bribe amount was $23.4 million, and the median was $1.1 million (the mean being high because of several large bribes, such as a $1.8 billion paid by Siemens
AG). Firms subjected to anti-bribery enforcement faced costs (penalties plus investigation, legal, and monitoring costs) averaging 3.3% of market value. In addition, they faced reputational costs (Karpoff, Lee, & Martin, 2014).
Cultural Factors Influencing Performance
For many reasons, many Americans fail in their overseas assignments. Between
16 and 40 percent of American expatriates return early from their overseas assignments, and between 30 to 50 percent of American expatriates are considered by their firms to have ineffective or marginally effective performance (Copeland & Grigcis, 1985).
International adjustments are significantly more difficult than domestic adjustments. With international moves, there can be significant differences in job role and corporate culture.
In addition, there can be issues with general culture, business practices, living conditions, weather, food, health care, daily customs, and potentially language (Black, Mendenhall,
& Oddou, 1991: 292).
A number of factors affect how an expatriate will perform overseas. Predeparture training tends to make cross-cultural adjustment easier. Black and Mendenhall find that,
“the empirical literature gives guarded support to the proposition that cross-cultural training has a positive impact on cross-cultural effectiveness” (Black & Mendenhall,
1990: 118). Previous overseas experience facilitates adjustment to overseas assignments, though Black discovered that though previous overseas work experience helped with
12 work adjustment, it did not for general adjustment outside of work (Black, 1988).
Organizational selection criteria, taking into account executives’ cross-cultural skills is important, though multinational enterprises tend to focus primarily on technical competence (Mendenhall, Dunbar, & Oddou, 1987). Individual skills that are important include the self-dimension (the ability to maintain mental health, psychological well- being, self-efficacy, and stress management), the relationship dimension (the ability to foster relationships with host nationals), and the perception dimension (the ability to perceive and evaluate the host environment and its people) (Mendenhall & Oddou, 1985).
Nonwork factors include cultural toughness (the more different the local culture is), and the adjustment of family (Mendenhall & Oddou, 1985).
Believing in oneself and being able to deal effectively with foreign surroundings is important (Mendenhall & Oddou, 1985). As individuals try new behaviors in foreign situations, the more feedback, both positive and negative, they will receive. This feedback can reduce the uncertainty of what is expected of them, which helps with adjustment. Self-efficacy will help expatriates to persist in developing new behaviors and with adjusting (Nicholson, 1984). Relational skills make it easier for individuals to interact with host nationals, and perceptual skills enable individuals to understand what is appropriate and what is inappropriate in the host country (Mendenhall & Oddou, 1985).
Edstrom and Galbraith, in a 1977 study, found that managers are assigned to overseas assignments to fill positions for which they have technical expertise, to get management development experience, and to transfer methods of decision processes to the host country. Expatriates and local managers, by working together, build a common corporate culture and create information networks (Edström & Galbraith, 1977).
13 Another factor affecting performance is acculturation. People adapt to cultures in different ways, depending on factors such as age or position (Froese, 2010: 343).
Individual behavior is affected by culture and social and personal variables (Berry, 1997:
5). Moderating factors to acculturation include age, gender, education, language, time in place, and societal attitudes (Berry, 1997: 15).
People who live in corrupt countries may more closely integrate with the local culture if they live there for a long time; if they have a local spouse; if they have close local friends; if they speak the local language; if their role involves working with local employees, suppliers, and customers; and if they work for a company that is integrated in the local economy.
Ang et al. define judgement and decision making as the human information processes for making decisions (Ang et al., 2007: 340). They researched the quality of decisions regarding intercultural interactions. Recognizing but moving beyond cultural stereotypes enables executives to understand others and to make higher quality cultural decisions (Ang et al., 2007: 341). Making effective decisions regarding intercultural interactions requires an understanding of cultural issues and values (Mendenhall &
Oddou, 1985).
Strategic Decision Making
Research on the strategic decision making process is generally divided into content research and process research (Elbanna & Child, 2007). Content research involves issues of strategy content such as portfolio management and diversification, and deals with the alignment of firm strategy with environmental characteristics. Process research, on the other hand, involves the process through which decisions are made and
14 implemented and the factors affecting the process. Process research is the aspect of decision making explored in this study.
The strategic decision making process is a core managerial activity for business organizations. In all organizations, managers make major decisions such as entering new markets, developing new products, and overcoming threats. The ability of managers to make these decisions is critical to the success of organizations (Elbanna & Child, 2007).
The strategic decision making process includes individual decision-specific characteristics, internal organizational context, and environmental factors (Schneider &
De Meyer, 1991). Other factors are management choice, decision-specific characteristics, environmental determinism, and firm characteristics (Rajagopalan, Rasheed, & Datta,
1993). Elbanna and Child focus on decision-specific, environmental, and firm characteristics (Elbanna & Child, 2007).
Decision-specific characteristics take into account that not all decisions are equally important, and that executives may deal with them in different ways (Papadakis,
Lioukas, & Chambers, 1998). Decision motive, whereby decision-makers categorize decisions as an opportunity or crisis, significantly affects decision making rationality.
Papadakis, Kaloghirou, and Iatrelli, in a case study of a chemical company, found that managers react differently when facing a crisis versus when considering an opportunity
(Papadakis, Kaloghirou, & Iatrelli, 1999: 33). When facing a crisis, managers used what seemed to be rational processes – they generated multiple alternatives, eliminated political debates, showed team spirit, and worked quickly. However, although their decisions seemed rational, they were influenced by short-term views and bounded rationality (Simon, 1972). After a crisis, when managers could re-evaluate the situation
15 and look at it as an opportunity, they developed a more questioning attitude, used more rational analysis and financial reporting of a limited number of solutions, and involved more political activities (Papadakis et al., 1999: 33).
Individual decisions are affected by three characteristics – importance, uncertainty, and motive (Elbanna & Child, 2007). Many authors consider importance to be the strongest explanation of rationality (Papadakis et al., 1999: 33). Some consider dealing with uncertainty to be the most important element of making decisions (Butler,
2002). Others consider that motive significantly affects decision making rationality
(Elbanna & Child, 2007).
Environmental characteristics significantly influence the degree of rationality
(Rajagopalan et al., 1993). Dean and Sharfman have found a negative relationship between competitive threat and level of procedural rationality (Dean & Sharfman, 1993).
Procedural rationality is the outcome of appropriate deliberation (Simon, 1976). The negative relationship may be due to the lack of time and resources required to undertake rational decision making in competitive environments (Dean & Sharfman, 1993).
Rationality in the strategic decision making process is affected by firm characteristics, such as structure, power distribution, past strategies, internal systems, size, corporate control, and past performance (Rajagopalan et al., 1993). Formal structures and centralization of power affect decision making processes (Miller, 1987).
Internal firm characteristics such as planning formality, performance, size, and type of ownership also affect the strategic decision making process (Papadakis et al., 1998).
Criminologists believe that people who commit acts use rational choice, taking into account a number of variables and seeking to gain the greatest benefits from their
16 actions (Prabowo, 2014: 310). People are generally guided by rationality, and with narrow selfishness, people have a predisposition to put their personal interests before others’ when making decisions (Caplan, 2006: 93-98). It is basic human nature to find pleasure and avoid pain, and humans try to maximize utility. When faced with Cressey’s fraud triangle, people will choose to participate or to not participate in corruption based on the option that offers the highest perceived net benefits (Hayward, 2007: 233).
The ability to deal with corruption is affected by determinants such as education level and years of international experience. Education should be negatively related to the level of corruption that people choose because education empowers people to stand up to demands of corrupt people (Schulze, Sjahrir, & Zakharov, 2013: 147). Executives with high education levels have more possibilities of getting more thorough information
(Bantel, 1993: 445), and highly educated executives are able to engage in more sophisticated analysis of decision making and to make more rational decisions (Francioni,
Musso, & Cioppi, 2015: 2231) and (Hsu, Chen, & Cheng, 2013: 4). International experience gives executives knowledge and confidence that enable them to effectively manage ambiguities associated with internationalization (Hsu et al., 2013: 9).
Motivation
A Fraud Triangle, developed by Donald Cressey in 1973, provides explanations for why people commit corruption. As shown in the figure below, it contains three elements – Opportunity, Rationalization, and Pressure/Motivation (Prabowo, 2014: 318).
17 Figure 3: Fraud Triangle
Opportunity for corruption exists when organizations have weak procedures and ineffective management. Pressure can come in the form of financial pressure, desire to get promoted, and fear of getting fired. Pressure is particularly powerful when it is not shareable, and the person considering corruption cannot discuss it with other people or seek help (Prabowo, 2014: 309). Rationalization is important because many people who commit corruption think of themselves as ethical people, and need to come up with reasons for their behavior. Common rationalizations are that corrupt people feel they are underpaid, that they are merely “borrowing” money that will be repaid, that the victims of their corruption deserve their treatment, or that the situation is only temporary (Glasbeek,
2014).
Theoretical Framing
Figure 4 depicts the theoretical framing of the study:
18 Figure 4: Theoretical Frame
Institutional theory and corruption. Institutional theory explains why business people act corruptly in that economic choices made by executives are ultimately enabled and constrained by complex configurations of institutions consisting of norms, beliefs, and related rule systems and organizations bounded by such rules (North, 1990; North,
1994). Institutional theory explains why people act corruptly in that they comply to complex institutional pressures and avoid related additional efforts or punishment. In light of institutional theory, bribing forms an institution which can be deemed legitimate and acceptable in some settings, and not in others. With pluralistic institutions, perceptions of legitimacy will also change over time (Schnackenberg, 2014). As public perceptions change, they influence political decision making (Webb, Tihanyi, Ireland, &
Sirmon, 2009). Currently, many global institutions, such as the World Bank, the
International Monetary Fund, Transparency International, and V-Dem Institute regard corruption as a menace to societal well-being and actively push governments to instigate
19 anti-corruption initiatives and change views of legitimacy related to corruption (BBC
News, 2013; International Monitary Fund, 2019; Transparency International, 2018; V-
Dem Institute, 2019; World Bank, 2016).
Institutions both constrain and enable firm executives by creating incentives and opportunities which can be exploited. The institutions can also create favorable environments for individual managers to seek personal gains. Several scholars
(Bräutigam & Knack, 2004; Mbaku, 2008) have therefore theorized that where legitimate institutions which take strong views on the legitimacy of corruption are weak, then the setting is more prone to corruption. Such settings are typically characterized by institutional processes and behaviors which are bureaucratic (Beck, Demirgüç‐Kunt, &
Maksimovic, 2005; Hallward‐Driemeier, Wallsten, & Xu, 2006; Kaufmann, Hellman,
Jones, & Schankerman, 2000), where economic constraints are present (Beck et al., 2005;
Binks & Ennew, 1996; Carpenter & Petersen, 2002; Musso & Schiavo, 2008; Okafor,
2017; Oliveira & Fortunato, 2006), where the legal system is weak or unreliable (Beck et al., 2005; Carlin, Schaffer, & Seabright, 2007; Demirgüç-Kunt & Maksimovic, 1998), and therefore where informal competition is strong (Ali & Najman, 2014; González &
Lamanna, 2007; Schneider & Enste, 1999). Scholars have indeed shown that in highly bureaucratic environments (Djankov et al., 2002; Meon & Weill, 2009) with onerous economic structures (Martin, Cullen, Johnson, & Parboteeah, 2007; Okpara & Wynn,
2007), weak legal systems (Ajie & Wokekoro, 2012; Zhou & Peng, 2012), and significant informal competition (Helmke & Levitsky, 2004; Ledeneva, 1998), firm executives are more likely to engage in bribery to improve their firm performance.
20 Social norm theory and corruption. Social norm theory accounts for why executives are likely to act corruptly at the individual level by following what is socially accepted as a norm that guides their behavior (Finney & Lesieur, 1982). Social norms can be defined as “rules and standards that are understood by members of a group, and that guide and/or constrain social behavior without the force of laws.” (Cialdini & Trost,
1998: 152). Four types of social norms are distinguished in the theory – personal norms
(individuals’ standards for behaviors and ethical beliefs), subjective norms (expectations of close others), injunctive norms (general societal expectations of behavior), and descriptive norms (standards that develop from observation of others’ behavior) (Cialdini
& Trost, 1998). Below is a table of social norm constructs (Bobek, Hageman, & Kelliher,
2013: 453).
21 Table 1: Social Norms
Under social norm theory, people are prone to behave corruptly if there are a sufficient number of other people around them behaving similarly (Dong et al., 2009).
Dong et al. argue that the decision to become corrupt depends on the frequency of corrupt acts and how other people reach them within a society. They explain that engaging in corrupt acts results in a disutility of guilt, which correlates negatively on the number of other people engaging in similar behavior. The more people engage in corruption, the lower the disutility of additional people participating in corruption (Dong et al., 2009).
Truex explored how social norms reduce the individual costs of corrupt behavior and hence encourage more corruption (Truex, 2011). Greppin showed how executives draw
22 upon appropriate social norms to make decisions about the degree to which they get involved with corruption (Greppin, Carlsson, Wolfberg, & Ufere, 2017). Although individual executives ultimately decide on whether to participate in bribery, firm participation in bribery is directly affected by social norms because such norms affect the decision makers. By explaining why people act corruptly through behaviors that are socially accepted as a norm, social norm theory addresses the research question, “What motivates local executives in Kyrgyzstan and Georgia to decide whether to participate in corruption?”
Ethical theory and corruption. Ethical theory explains why executives act corruptly by illustrating how they seek to rationalize their corrupt behaviors (Ayal &
Gino, 2011; Tyson, 1990). Such explanations come in multiple different forms.
Situationalism suggests that with executive’s corrupt behaviors, surrounding circumstances play a larger role than do the individual’s character (Kamtekar, 2004).
Situationalism suggests that people feel they have little choice but to behave in corrupt ways given the circumstances. When executives participate in corruption, in line with this theory, they do so because they feel they have to. They are reactive, and they feel that they are just realistic in what they can accomplish. By paying bribes they are able to get materials out of customs, get new business, avoid retaliation, enable their companies to thrive, or avoid their companies being shut down.
Conformity bias suggests that people take cues for unethical behavior from the actions of others rather than relying on their own judgement (Moscovici & Faucheux,
1972). With moral equilibrium, individuals may use moral compensation and moral licensing to justify unethical behaviors (Prentice, 2011). For example, executives that
23 participate in corporate social irresponsibility are most likely to participate also in social responsibility initiatives (Kotchen & Moon, 2012). With bounded ethicality, organizational and psychological pressures can cause people to make decisions that are inconsistent with their ethics (Gino, Moore, & Bazerman, 2009; McCarthy, Puffer,
Dunlap, & Jaeger, 2012). As Herbert Simon discusses in Theories of Bounded
Rationality, people are rational, but only boundedly so. People are also bounded ethically
(Simon, 1972). Loss aversion entails that people hate losses more then they enjoy gains, and are more likely to unethically avoid a loss than to capture a gain (Kahneman,
Knetsch, & Thaler, 1991). Obedience to authority means that people can behave unethically as a way to please authority (Aguilera & Vadera, 2008). With moral muteness, people may not see ethical issues (Bird & Waters, 1989). Moral myopia means that people can rationalize bad behavior in order to reach their goals (Landy &
Royzman, 2018). With moral disengagement, people can turn off their ethical judgement when they feel a psychological need to do something (Moore, 2008). By explaining why people act corruptly through rationalization, ethical theories address the research question, “What can motivate local executives in Kyrgyzstan and Georgia to decide whether to participate in corruption?”
What Is Empirically Known of Antecedents of Executive Corrupt Behaviors
There is a growing, steady stream of empirical studies on corruption in sociology, economics, and political science. Appendix A provides a synthesized review of 44 articles that address the study’s problem space. These articles use varied methods to cover the three families of theories listed above and to provide findings on antecedents of executive corrupt behaviors.
24 Bureaucratic constraints are external administrative demands placed on a firm that are outside of its control. They affect both bribing activity and ultimately firm performance. Firms that face higher bureaucratic constraints are more likely to participate in corruption (Asher & Rajan, 2001; Djankov et al., 2002; Gaviria, 2002; Safavian,
Graham, & Gonzalez-Vega, 2001) and are more likely to have lower performance (Beck et al., 2005; Buckberg, 1997; Hallward‐Driemeier et al., 2006; Kaufmann et al., 2000).
Economic constraints are external economic factors that affect a firm but are outside of its control. Economic constraints affect both bribing activity and firm performance. Firms that face more economic constraints are more likely to participate in corruption (Besley & McLaren, 1993; Martin et al., 2007; Okpara & Wynn, 2007) and are more likely to have reduced firm performance (Beck et al., 2005; Binks & Ennew,
1996; Carpenter & Petersen, 2002; Musso & Schiavo, 2008; Okafor, 2017; Oliveira &
Fortunato, 2006).
Legal system effectiveness - the fair enforcement and adjudication of rule of law - affects the firms and are out of their control. Firms that operate in environments with a higher legal system effectiveness are less likely to participate in corruption (Ajie &
Wokekoro, 2012; Ali & Isse, 2002; Fagbemi, Uadiale, & Noah, 2010; Zhou & Peng,
2012) and are less likely to have reduced performance (Beck et al., 2005; Carlin et al.,
2007; Demirgüç-Kunt & Maksimovic, 1998).
Informal competition is the presence and effects of competition from unregistered or informal firms. Informal competition has similar effects as bureaucratic and economic constraints on bribing activity and firm performance. Firms that face more informal competition are more likely to participate in corruption (Helmke & Levitsky, 2004;
25 Lambsdorff, 2002; Ledeneva, 1998; Tonoyan, Strohmeyer, Habib, & Perlitz, 2010) and are more likely to have reduced performance (Ali & Najman, 2014; González &
Lamanna, 2007; Schneider & Enste, 1999).
Anti-corruption initiatives focused on institutional re-shaping typically on the bureaucratic, economic, legal, and competitive processes in the country setting. Studies have shown there is a positive relationship between the level of bureaucracy and the amount of bribing activity (Djankov et al., 2002; Gaviria, 2002) measured as the amount, frequency, and impact of bribes (World Bank Group, 2013). So, adding bureaucratic constraints including simple regulatory oversight may increase the levels of corruption.
Individuals and firms with limited access to financial resources are more likely to engage in corruption (Martin et al., 2007) and firms with increased financial constraints will be more likely to use corrupt methods to get financing or government subsidized loans
(Okpara & Wynn, 2007). So, the fewer economic constraints that stifle executives and firms, the more effective can be anti-corruption initiatives. Individuals and firms are more likely to commit illegal acts, if the legal system is considered unfair and ineffective (Ali
& Isse, 2002). If a legal system does not work, then people can commit illegal acts without risk (Fagbemi et al., 2010). The better functioning the legal system is, the more effective can the anti-bribery campaigns be. Informal competition comes from unregistered or informal firms which are more common when formal institutions are weak or are not enforced (Helmke & Levitsky, 2004). Increased levels of informal competition sustain environments more conducive to corrupt activity (Lambsdorff, 2002;
Tonoyan et al., 2010). The more the informal competition can be held at bay, the more effective will be anti-corruption initiatives.
26 Overall, some scholars argue for the “sand the wheels” hypothesis, which claims that bribing activity lowers firm performance (Meon & Weill, 2009; Seker & Yang,
2012). Other scholars are committed to “grease the wheels” hypothesis, where bribing activity has a positive effect on firm performance (Hellman, Jones, & Kaufmann, 2003;
Williams, Martinez-Perez, & Kedir, 2016).
We do not know specifics of these effects in former Soviet republics such as
Kyrgyzstan and Georgia, which have unique historical and economic contexts. Also, we know less about why countries perform differently over time, such as we can observe with the case of Kyrgyzstan and Georgia. This calls for a more nuanced analysis as stated in my research questions and the use of a mixed methods design. Hence, this study is motivated by the gaps in comparative country knowledge and by the lack of more nuanced analyses of such differences that can only be accounted for by mixed method designs. By studying bribery in Kyrgyzstan and Georgia using mixed methods, I hope that this study helps address some important gaps in comparative analyses of corrupt behaviors.
Research Motivation and Goals
Per the review of articles above, we can note that there is a lack of knowledge in the expatriation literature about the effects of sources of fear and threat affecting expatriates displaced in corrupt environments. Studies have not examined interrelationships between the pressures overseas executives face, the incentives they face to be corrupt, and specifics of what corrupt activity they may conduct. As a result, the purpose of the first Qualitative strand was to focus on the phenomenon of how US expatriates work in dangerous environments of pervasive corruption. People who would
27 not normally participate in corruption in their own environments may act differently in environments where corruption is more common. In countries that have high levels of corruption, executives face situations that test their ethics (Powpaka, 2002). In my personal experience working and living in corrupt countries such as Uzbekistan,
Kyrgyzstan, and Afghanistan, I witnessed American executives facing dilemmas and challenges and failing this test of their ethics. While the executives may not have resorted to unethical behavior in the U.S., they found themselves unable to keep their ethical integrity in corrupt situations, and they resorted to corruption.
Because this study’s goal is to review specifics of why and how executives decide to act corruptly, it uses a qualitative method conducting semi-structured interviews with
U.S. executives who have lived and worked for U.S. companies overseas as the data collection strategy. An analytical approach uses grounded theory to analyze the interview data (Charmaz, 2014). The study focuses on individual decision makers and how and why they face corruption. It reviews environmental/contextual factors that affect decision making, strategic decision making by senior executives, and issues surrounding ethical behavior.
The Qualitative strand explores the motivation of individuals. Because corruption is damaging, it is also important to explore motivation of firms, and to understand factors that contribute to firms participating in corruption. This can best be done with a large sample of data in a Quantitative strand. Hence, there is a need to conduct mixed methods.
The Quantitative strand studies bribery in fourteen countries that were former
Soviet republics – Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan,
Kyrgyzstan, Latvia, Lithuania, Moldova, Russia, Tajikistan, Ukraine, and Uzbekistan.
28 Not included is the secretive country of Turkmenistan, for which there is no data. Figure
5 shows location of the fourteen countries:
Figure 5: Fourteen Former Soviet Republics
The former Soviet republics offer unique history and context and are important to study for five reasons. First, all fourteen countries were subjects of the Soviet Union and gained independence as separate countries in 1991 (Gleason, 1997). All fourteen countries have new governments, are evolving, and can serve as a litmus for how corruption functions in other countries with new governments. Second, all fourteen countries had planned economies until 1991, and they are adjusting to surviving in market economies (Brown, 2014). A study of these countries can provide perspectives on how corruption functions in countries transitioning from planned to market economies.
Third, the former Soviet republics have a history of being corrupt and suffer from “path 29 dependency” (Bardhan, 2006; David, 1985). If countries have high levels of corruption, they may get stuck in this equilibrium and have difficulty moving into a lower level of corruption (Tonoyan et al., 2010). The Soviet Union has a history of being corrupt
(Feldbrugge, 1984; Simis, 1977). Tibor Szamuely, a Hungarian politician who died a few years after the fall of the Russian tsar in 1917, stated that, “Of all the burdens Russia has had to bear, heaviest and most relentless of all has been the weight of her past.”(Hedlund,
2005). Hedlund writes that history is important to the shaping of economic behavior. The economies of former Soviet Union states do not shake their historic patterns of being corrupt (Hedlund, 2005). Fourth, while significant changes were made to political, economic, and legal systems in the former Soviet republics after the fall of the Soviet
Union, informal codes of conduct and norms did not quickly change (Helmke &
Levitsky, 2004), and unwritten codes and social conventions are powerful (Ledeneva,
1998). Finally, most countries in the group are highly corrupt and provide a rich sample for study. Table 2 shows the corruption rankings of the countries in the study (higher number indicating higher level of corruption):
30 Table 2: Corruption Ranking
2013 Transparency International Corruption Ranking Country Out Of 177 Countries Armenia 94 Azerbaijan 127 Belarus 123 Estonia 28 Georgia 55 Kazakhstan 140 Kyrgyzstan 150 Latvia 49 Lithuania 43 Moldova 102 Russia 127 Tajikistan 154 Ukraine 144 Uzbekistan 168 (Transparency International, 2016)
By studying corruption in the former Soviet republics, this Quantitative strand addresses an important gap in literature. While there is scholarship about corruption in this region (Helmke & Levitsky, 2004; Ledeneva, 1998), and there is scholarship that uses similar models and similar firm level data provided by the World Bank (Tonoyan et al., 2010; Ufere, 2011), there are few studies that specifically address firm level corruption in the former Soviet republics. Given this region’s history with corruption, its new governments, its transition from planned economy to market economy, and its current high levels of corruption, it is exciting to explore firm level corruption activity.
The purpose of the Quantitative strand is to discover how external factors affect the amount of bribing activity that is conducted by firms in the former Soviet republics.
Using quantitative techniques, the study looks at how bureaucratic constraints, economic 31 constraints, legal system effectiveness, and informal competition affect bribing activity and affect firm performance. Bribing activity is comprised of bribing payment (bribes paid or requested to be paid), bribing frequency (frequency of paying bribes), and bribing impact (impact of paying bribes). Firm performance is measured by sales growth and employment growth.
The study uses World Bank Enterprise Surveys (WBES) data of 2,956 firms in the fourteen former Soviet republics to conduct a quantitative analysis. The study used a model similar to others used to analyze WBES data. For example, Ufere uses a model similar to this in a study of bribery in Nigeria (Ufere, 2011).
The study uses institutional theory, social norm theory, and ethical theory to help explain bribing activity on firm performance. Institutional theory suggests that economic choices made by firm managers are enabled and constrained by a complex set of institutions (North, 1990; North, 1994) in which firms are embedded. Social norm theory suggests that people are prone to be corrupt if there are a sufficient number of corrupt people around them (Dong et al., 2009). Ethical theory explains how firms rationalize corrupt behavior through conformity bias, moral equilibrium, and bounded ethicality
(Ayal & Gino, 2011; Gino et al., 2009; McCarthy et al., 2012; Moscovici & Faucheux,
1972; Prentice, 2011; Simon, 1972; Tyson, 1990).
The purpose of the quantitative+Qualitative strand is to explain and interpret findings from the previous Qualitative and Quantitative strands. The quantitative+Qualitative strand explains, expands, and interprets findings of the quantitative strand. It explores in particular what reinforces, stimulates, and shapes executive’s behaviors. In countries with a pervasive culture of corruption, owners and
32 CEOs of locally owned firms face significant challenges to run their businesses corruption free (Powpaka, 2002). The quantitative+Qualitative strand helps answer how different kinds of corrupt behaviors are manifested in sampled settings. It provides external validity to the study because the sample of locals in the former Soviet republics is different than the sample of US executives used in the first QUAL study.
By studying differences in the level and antecedents of corruption at the level of executives in Kyrgyzstan and Georgia, this study addresses an important gap in the current literature. While there is scholarship about corruption in the former Soviet republics (Helmke & Levitsky, 2004; Ledeneva, 1998), and there is scholarship that has used similar models and firm level data provided by the World Bank (Tonoyan et al.,
2010; Ufere, 2011), to our knowledge there are no comparative studies addressing firm level corruption in two countries with different corruption levels in former Soviet countries.
Research Design
The study will be mixed methods with a sequential, explanatory, Qualitative →
Quantitative → quantitative+Qualitative strands with two integration points (Creswell &
Plano Clark, 2007; Teddlie & Tashakkori, 2009). Utilizing a mixed method process provides fresher insight into the study of corruption and helps address three related research questions informed by the overall question- one for each strand. With a concurrent triangulation design, the study uses the different strands to look at the same aspects from various angles, which can overcome the bias from using just one method and can explain potential contradictions between quantitative and qualitative findings
(Creswell & Plano Clark, 2007; Teddlie & Tashakkori, 2009). Using an embedded design
33 containing a concurrent quantitative strand and qualitative strand, the third quantitative+Qualitative study explains, interprets and expands findings from the earlier
Qualitative and Quantitative strands. Figure 6 below provides an overview of the phases:
Figure 6: Research Design
34 CHAPTER 3: HOW U.S. EXECUTIVE EXPATRIATES WORK IN ENVIRONMENTS OF PERVASIVE CORRUPTION
Introduction
When U.S. expatriate executives live and work in countries with pervasive corruption, they make choices about the degree to which they participate in corruption. In this qualitative strand, I interviewed 30 U.S. executives who worked in such countries.
Some refused to participate in corrupt practices, others chose to reluctantly succumb to extortion, while others willingly participated in corruption. I illustrate costs the executives incur from making the decisions and reasons for why they make the decisions.
I found that social norms played a significant role in their decisions. There are four social norms - personal norms (individuals’ standards for behaviors and ethical beliefs), subjective norms (expectations of close others), injunctive norms (general societal expectations of behavior), and descriptive norms (what other people actually do). U.S. executives rely on personal norms and injunctive norms for deciding on zero tolerance for corruption, on descriptive norms and subjective norms for deciding to succumb to extortion, and on descriptive norms and personal norms for deciding to pursue corruption.
These findings help us understand what motivates U.S. executives to make decisions about participating in corruption when living and working in countries with pervasive corruption.
The problem of practice is, “The difficulty of western companies to uphold ethical integrity when operating in foreign countries where there exists a pervasive culture of corruption.” The research question is, “What motivates U.S. executive expatriates who work in environments of pervasive corruption to decide whether to participate or not participate in corruption?” 35 Method
This study used a qualitative method employing semi-structured interviews and grounded theory to analyze past experiences of individuals. The purpose of grounded theory is to construct theory grounded in data (Corbin & Strauss, 2015). The grounded theory method is comprised of constant comparison (as data is collected, it is simultaneously analyzed) and theoretical sampling (decisions about the next step in the data collection are based on the theory as it is constructed) (Glaser & Strauss, 2009). I used the inductive approach, focusing on specific people and their actual experiences
(Maxwell, 2013). Coding was used to identify key themes and knowledge.
Sample. Interviews were conducted with 30 U.S. executives who have lived and worked for U.S. companies overseas in countries that are considered highly corrupt.
Respondents were selected based on my social network and on their recommendations.
Interviewees worked and lived in 32 countries. All executives had significant decision making authority. Executives at small companies (less than 1,000 employees), had profit and loss authority for the overseas location. At large companies with more than 1,000 employees, the executives were department heads at the overseas location for a function such as finance, operations, or purchasing, or were responsible for at least $50 million in purchase volume at the overseas location.
No interviews were conducted with more than one individual from any one organization. None of the potential participants had a reporting relationship with me in any way. Following is the breakout of respondents by region and country. Listed is each country’s 2015 Transparency International Corruption Perception Index Ranking
(Transparency International, 2015):
36 Table 3: Respondents by Country and Region
N u m b e r * Transparency International Small Large Region Country Ranking Total Company Company Central African Republic 145 1 1 Democratic Republic of Congo 147 2 2 Gabon 99 2 2 Ghana 56 2 2 Guinea 139 2 2 Africa Liberia 83 2 1 1 Madagascar 123 1 1 Nigeria 136 2 1 1 South Africa 61 2 2 Uganda 139 2 1 1 Total Africa 18 3 15 Afghanistan 166 10 10 Russia Kyrgyzstan 123 3 3 and Russia 119 5 5 Central Tajikistan 136 2 2 Asia Uzbekistan 153 6 6 Total Russia and Central Asia 26 26 China 83 12 8 4 Indonesia 88 2 2 Malaysia 54 2 2 East Mongolia 72 2 2 Asia Philippines 95 2 2 Thailand 76 4 1 3 Total East Asia 24 15 9 Iraq 161 2 2 Syria 154 1 1 Mideast Turkey 66 3 2 1 Total Mideast 6 5 1 Columbia 83 1 1 Guatemala 123 1 1 Haiti 158 1 1 South Honduras 112 1 1 America Peru 88 1 1 Venezuela 158 1 1 Total South America 6 2 4 South India 76 2 2 West Nepal 130 1 1 Asia Total South West Asia 3 3 * Respondents lived and worked in multiple countries
37 Data collection. Interviews were collected between April 2016 and August 2016.
Semi-structured interviews of approximately one hour were guided by an interview protocol (please see Appendix B). One interview was conducted face-to-face and the remainder were conducted by phone or Skype. All interviews were audio recorded with permission. Within 24 hours, the interviews were transcribed for analysis by a commercial vendor.
Participants were advised that their names would not be shared with anyone and that the information they provided would be kept confidential. All consented to participate in the interviews and to allow audio recordings. Participants were advised that they could exit the interview at any time and that any data collected up to that point in the interview would be destroyed and not used as part of the research. No participants felt a need to exercise this option, and all participants completed their interviews.
Data analysis. After receiving the transcript for each interview, I conducted a quality check to ensure that transcriptions accurately reflected audio recordings. Then, each transcript was de-identified so that anonymity could be assured. Names of people, schools, and companies were removed. Next, I coded the transcripts using open coding
(Charmaz, 2014). In the first level of coding, four hundred forty-two (442) codes were created. A second level of coding reduced the number of codes to forty (40). A third level of coding produced seven (7) codes. These codes were then reduced to three categories: zero tolerance for corruption, succumb to extortion, and pursue corruption.
Findings
My research suggests that U.S. executive expatriates working and living in corrupt countries made decisions about participating in corruption in three ways: zero
38 tolerance for corruption, reactively succumb to extortion, and proactively pursue corruption. Each had different behavioral characteristics. Zero tolerance respondents avoided participating in corruption and kept subordinates from participating as well. In succumb to extortion, respondents reactively succumbed to extortion under threat of financial harm. In pursue corruption, respondents proactively pursued corruption as an efficient way to build their companies and to capture personal gain.
I made three findings based on social norms. As discussed in the literature review section above, the four social norms are personal norms (individuals’ standards for behaviors and ethical beliefs), subjective norms (expectations of close others), injunctive norms (general societal expectations of behavior), and descriptive norms (what other people actually do) (Bobek et al., 2013: 453). For each of these three findings, a) U.S. executives face significant costs when deciding to participate in each behavior, and b)
U.S. executives rely on different social norms when deciding how to respond to corruption. The following table illustrates the findings structure:
39 Table 4: Findings Summary
Finding 1a: U.S. executives face significant costs when deciding on zero tolerance for corruption. It is difficult for executives to have zero tolerance and to consistently decline to participate in corruption. Frequently, there are costs to not participating in corruption. One cost is emotional. For example, where giving gifts is an important part of local culture, not accepting gifts can be emotionally difficult. An executive, who was meeting the chairman of a large Korean company for the first time, described this situation at a ceremony: “Mr. Chairman...our company policy is we can't accept gifts more than $50 and you have such exquisite taste in ties…please don't take it personally; we need to thank you for the tie but give it back to you.”
It was emotionally painful for the executive to return the tie. It would have been far easier for the executive to have accepted the gift in the ceremony. He would have 40 avoided the awkward return of the gift, and he would have avoided hurting the chairman’s feelings. The executive could have pretended to not notice that the tie was over his $50 gift limit, he could have left the tie in his hotel room, or he could have returned the tie to the chairman’s company at a later time.
However, by accepting the gift, he would have started on a slippery slope. As the executive said, “you're down that slippery slope and then you're just hoping that something doesn't go wrong. It's better to try immediately to get it corrected…and give it back in that same moment and then you don't have a problem.”
Another cost is losing business. One executive reflected that, “Of this particular line, I've lost 35% of my volume this year and last year because of this one distributor coming in and doing this.” Another said, “I knew for a fact if I said, "Hey, listen buddy,
I'll peel off $500 on every containerized housing unit that you give me. Let's do business." I knew for a fact that I would have gotten huge business.” Another executive said, “I remember meeting with the head of the air force, General Anwar. I think they were expecting me to give a bunch of money to his son, and when I didn't give a bunch of money to his son, this contract to do the maintenance on their helicopters.”
Another cost is that executives can face retaliation if they do not participate in corruption. One executive, who had refused to pay a bribe, stated, “He did retaliate big time...Oh yeah, yep, he sent his people after me and they pulled guns on me and I had to call very, very senior contacts in the capitol to essentially get them to…they essentially detained me and my team.”
Finding 1b: U.S. executives rely primarily on personal norms and secondarily on injunctive norms for deciding on zero tolerance for corruption. Because it is difficult
41 to decline to participate in corruption, and because many decisions, such as declining the tie, must be made on the spot, personal norms (self-based standards or expectations for behavior) are of primary importance when executives decide whether or not to participate in corruption. Primary is defined as “something that is the most important”
(Dictionary.com, 2016). Having firm convictions about how to behave makes decision making quick and easy. When faced with ethically complex situations, executives can know how to decide, and be able to decide, on a consistent basis and be able to avoid corruption. One executive, in describing why he did not participate in corruption, said, “It wasn't right. I don't mean to sound like I'm pure as a drift of snow, but it was ethically and morally wrong. It would have been wrong.” Appendix C illustrates other personal norms and how they served to keep people from participating in corruption.
Injunctive norms (general societal expectations of behavior) provide secondary motivation for zero tolerance for corruption, though they did not provide as strong a motivation as the personal norms. Secondary is defined as “belonging or pertaining to a second order” (Dictionary.com, 2016). The injunctive norms involved not breaking rules and laws. One executive said, “Hey man, I don't have permission to break the law for the company. Nobody else does, right?” Another executive, who had been approached about hiring the child of a government official, said, “There's very specific Foreign Corrupt
Practice Act language about employing children or relatives of government officials.
When I learned that I met the kid, he sounded like a good kid but I realized it was not going to be something that could work out.”
Finding 2a: U.S. executives face significant costs when deciding to succumb to extortion. As discussed above in the Literature Review, when executives succumb to
42 extortion and violate the Foreign Corrupt Practices act, they face legal risks, work risks, and reputational risks. The also face emotional costs. One executive who decided to pay bribes said, “Yeah. Nobody knows that shit. I've got to be a survivor, man. It's been brutal sometimes…You've got to be a survivor.” Another cost is that executives do not know where their money is actually going. According to one executive who paid a local partner to facilitate operations, said, “My assumption was always that he might be getting 10% or
15% or something. I don't think we had situations where people start raising us to be taking 90% and paying 10%...It was always frustrating not really knowing where your money was going.” Another cost involves getting on a slippery slope and not feeling comfortable with the ethics. One executive who paid bribes said, “That first time, I can make the ethical justification. The problem is by the second or third time, you usually can become the very thing that you hate.”
Finding 2b: U.S. executives rely primarily on descriptive norms and secondarily on subjective norms for deciding to succumb to extortion. When executives decide to succumb to extortion, they generally do so because they feel they have no choice. They are being reactive, and they feel that they are being realistic - only by paying bribes will they be able to get materials out of customs, get new business, avoid retaliation, enable their company to thrive, or avoid their company being shut down.
The executives are responding to descriptive norms (what other people actually do). One executive, who was responsible for getting materials imported into a corrupt country, said, “You're either going to pay for your ship sitting out in the bay not being unloaded daily to the ship or pay a whole hell of a lot less to the customs guy to get them to bring it in.” Another executive found that making payments was critical for keeping
43 his company running. He said, “Yeah, the alternative would have been shutting the company down.” Appendix D illustrates other descriptive norms and how they served to encourage people to succumb to extortion.
Subjective norms (expectations of close others), in the form of cultural expectations for gift giving, have a smaller effect. One executive who paid bribes said,
“we paid because it was an expected part of the culture to pay a gift on top of whatever you were paying officially or because we were forced into that situation.” Another stated,
“there's, like I said, there's benign corruption which is just a gift giving culture that someone expects a little something because they're helping you and they're not making any money on their official salary.”
Finding 3a: U.S. executives face significant costs when deciding to pursue corruption. As discussed above in the Literature Review, when executives violate the
Foreign Corrupt Practices Act through pursuing corruption, they face legal risks, work risks, and reputational risks. They also face emotional costs. One executive who pursued corruption said, “I ground my teeth. I couldn't sleep at night. I couldn't talk to anyone about it. A big reason I got divorced.” Another cost is not being able to trust people. An executive said, “The partner was trying to screw us. Even your employees there you've got to watch.” And another said, “There's suspicion. You can't always keep your eye on it...You really can't trust a lot of people in this line of work.” Another cost is risk to personal safety. According to one executive, “I would a little bit worry about my personal safety, in general, with these guys. They're a little aggressive.”
Finding 3b: U.S. executives rely primarily on descriptive norms and secondarily on personal norms for deciding to pursue corruption. Since executives have a choice
44 when deciding whether or not to pursue corruption, they are being proactive and are actively making decisions about how to act. Descriptive norms (what other people actually do) provide the executives with a guide for how people behave in the environments in which they work. One executive, commenting that corruption is a method for getting things accomplished, said, “If you want to be a Boy Scout you might as well just never leave the airport.” Another spoke about how,
You'd tell them, "Well this is how much I think I owe in taxes." He'd look at the sum with kind of a blank face. Then he'd go tell somebody to say that all right this guy needs a new, I don't know, a radio or something like that. You'd be like, "All right this is what we're going to pay for our taxes and by the way for all your hard work here's a new radio."
Another reflected that corruption was important for getting things accomplished in emergencies:
There are going to be times, particularly in emergency times when you may have to do things that in an otherwise safe setting, somebody might say, was unethical. For example, let's say you've got people in Libya when the Libyan government collapses. They're your people, you're responsible for them. I personally wouldn't blink twice at, "I've got to pay somebody off to get them out." Do it.
Another executive who worked for a foreign manager said, “There was pressure put on me to make payment, and I'm asking for backup, and I'm told to shut the fuck up and just make the payment.” Appendix E illustrates other descriptive norms and how they served to encourage people to pursue corruption.
Personal norms (individuals’ standards for behaviors and ethical beliefs), guide the executives when they decide how deeply to pursue corruption. One executive stated,
“that didn’t bother me as much because it was, you know, it was providing something for the organization, for the Afghan National Army Air Corp. That wasn’t something that was going to go in his pocket or really benefit him.” This rationale helped him decide to 45 participate in corruption, but it was the descriptive norms listed above that had a stronger impact on executives.
Discussion
The findings section notes that U.S. executives decided to participate or to not participate in each of the three behavioral categories (zero tolerance for corruption, reactively succumb to extortion, and proactively pursue corruption). The findings highlight costs that the executives faced when deciding to participate in each behavior.
The findings also highlight motivations for why executives made these decisions. These motivations are benefits that the executives could capture when they made decisions.
The executives considered costs and benefits and used rational choice when they made their decisions. With rational choice, people seek to gain the greatest benefits from their actions, taking into account a number of variables (Prabowo, 2014: 310). People have a predisposition to put their personal interests before others’ when making decisions
(Caplan, 2006: 93-98). Deciding to not participate in corruption, to reactively succumb to extortion, or to proactively pursue corruption can make rational sense given the circumstances in which the decisions were made. As discussed in the literature review, when faced with Cressey’s fraud triangle, people will choose to participate or to not participate in corruption based on the option that offers the highest perceived net benefits
(Hayward, 2007: 233).
Executives have a desire to not fail. As noted in the literature review, between 16 and 40 percent of American expatriates return early from their overseas assignments, and between 30 to 50 percent of American expatriates are considered by their firms to have ineffective or marginally effective performance (Copeland & Grigcis, 1985). These
46 executives may feel desperate and be more likely to succumb to extortion or to pursue corruption. Desperation provides a pressure/motivation illustrated in Cressey’s fraud triangle (Prabowo, 2014: 318). Executives are particularly likely to be desperate if they work for small private companies since they may not have alternative roles available for them at other locations if their current roles do not work out. In addition, executives who own small private companies are likely to be desperate because their personal financial well-being is intertwined with that of their company.
When executives decided not to participate in corruption, the motivations
(benefits) outweighed the costs. While research literature examines how people use rational choice to make decisions, it does not discuss how costs align with social norms.
As discussed previously, the four social norms are personal norms (individuals’ standards for behaviors and ethical beliefs), subjective norms (expectations of close others), injunctive norms (general societal expectations of behavior), and descriptive norms (what other people actually do) (Bobek et al., 2013: 453).
This study shows how specific costs from choosing different behaviors mapped to specific social norms for why executives chose the behaviors. Dong et al, Truex, and
Wenzel explored how social norms effect corruption participation levels. Their studies did not take into account personal norms. My study explores how personal norms, as well as the other types of social norms (subjective, injunctive, and descriptive), effect decision making on participating in corruption.
When executives decided to not participate in corruption, the costs of enduring emotional pain were outweighed by the strong convictions of personal norms. The costs
47 of losing business and employees, and the costs of facing retaliation, were both outweighed by injunctive norms, with rules barring such behavior.
When executives decided to reactively succumb to extortion, the benefits also outweighed the costs. The costs of enduring emotional pain and the costs of not knowing where money is going were outweighed by the descriptive norms of no alternative behavior. The costs of getting on a slippering slope were outweighed by the subjective norms of cultural expectations.
When executives decided to proactively pursue corruption, the benefits again outweighed the costs. The costs of enduring emotional pain were outweighed by the descriptive norms of how to get things done. The costs of not being able to trust people and the costs of facing risks to personal safety were outweighed by the personal norm of ends justifying means.
Interestingly, the U.S. executives endured emotional pain regardless of which of the three different paths they chose. America is ranked as the 17th least corrupt country in the world, a ranking lower than the countries in which the executives were working
(Transparency International, 2015). The executives came from an environment where corruption is less pervasive than their host countries. It is not surprising that they faced emotional pain when they chose to participate in corruption. And it is understandable that they faced emotional pain when the choose not to participate in corruption. Doing things such as declining gifts brings social angst.
It is noteworthy to explore how different types of social norms effected the executives’ decisions. Each behavioral category was affected by two sets of social norms.
For Zero Tolerance for Corruption, personal norms were of primary importance. Having
48 firm convictions about how to behave enabled the executives to make decisions quickly and easily. Personal ethics (a type of personal norms) played an important motive in in the decisions of executives. This aligns with Elbanna & Child, who state that motive significantly effects decision making (Elbanna & Child, 2007, 567). Personal ethics enabled the executives to immediately reject extortion attempts. For example, one executive used humor as a technique to immediately deflect extortion attempts. He said,
I use humor and age and rank to try to deal with that. For instance, if I get a customs official who says, "Well, give me a gift for my wife," I say, "Listen, buddy. If I give my gift to you, my wife is going to get pissed off at me, because I didn't give her that gift," and everybody laughs and they say, "Get out of here."
Injunctive norms played a secondary role. These norms also provided motivation, with executives feeling it was important to not break rules and laws.
For succumbing to corruption, descriptive norms were of primary importance.
The executives felt that had no choice but to succumb to extortion if they wanted their companies to remain open. They were being reactive and were responding to what other people actually do. This aligns with Elbanna and Child, who stated that importance is the strongest explanation of rationality (Elbanna & Child, 2007, 507). Subjective norms had a secondary role. Acting in ways that the local culture expected provided a motivation for succumbing to extortion but did not provide the entire impetus.
For pursuing corruption, description norms were also of primary importance.
Executives responded to how people actually behaved and how they could get things done. They were doing what they felt was important, which also aligns with Elbanna and
Child. Personal norms had a secondary role. They provided a motivation, enabling executives to rationalize their behavior. This motivation was important, because it is not
49 easy to participate in corruption and to elude the law. It takes energy and skill to execute corrupt acts such as creating butterfly companies to avoid paying value added taxes.
Summary of Qualitative Study
The purpose of this qualitative study is to help understand how US expatriates living and working in dangerous environments characterized by pervasive corruption deal with the phenomena and make decisions about the degree to which they get involved. To answer this question, 30 US executives who worked in such countries were interviewed.
Some executives refused to participate in corrupt practices, others chose to reluctantly succumb to extortion, while others willingly participated in corruption. The study found that social norms played a significant role in their decisions. There are four social norms: personal norms, subjective norms, injunctive norms, and descriptive norms. US executives rely on personal norms and injunctive norms for deciding to refuse to participate in corrupt practices, on descriptive norms and subjective norms for deciding to reluctantly succumb to extortion, and on descriptive norms and personal norms for deciding to willingly participate in corruption. These findings illustrate what motivates
US executives to make decisions about participating in corruption when living and working in countries with pervasive corruption.
This study has implications for policy, research, and practice. It highlights how specific costs from choosing different courses of action map to specific social norms for why executives choose the behaviors. This offers new insights into the literature on social norm compliance and risk in the international context and opens new avenues for future research.
50 CHAPTER 4: DOES BRIBERY AFFECT FIRM PERFORMANCE? THE EFFECT OF EXOGENOUS FACTORS IN FORMER SOVIET REPUBLICS
Introduction
How do external factors affect bribing activity, and how does bribing activity affect firm performance? Since bribing is widely considered to be damaging to economies of countries where it occurs, and since performance of firms is critical to the health of economies, this is an important question. To answer this question, I used World
Bank Enterprise Survey data of 2,956 firms in the former Soviet republics where bribing is prevalent. Using structural equation modeling, I found that bribing activity has a significant direct positive effect on firm performance. Bribing activity was measured by the extent, frequency, and impact of providing additional payments or gifts to get things done. Firm performance was measured by sales growth and employment growth. I conclude that firms undergo risk, effort, and expense to bribe, and they do so rationally only when it increases firm performance. This research makes the distinctive point that policy makers need to recognize that even though corruption is bad for countries, it can be good for individual firms. Policy remediation must therefore address the unmerited benefits of bribing activities by changing the cost benefit ratio through making costs of bribing higher and benefits of bribing lower. These findings offer insights to scholars on the literature on corruption and to policy makers and practitioners on pragmatic methods for reducing corruption and enhancing firm performance.
The problem of practice is, “How external factors affect bribing activity and how bribing activity affects firm performance.” The Research Question is, “In the former
Soviet republics, to what extent do bureaucratic constraints, economic constraints, legal
51 system effectiveness, and informal competition affect bribing activity and to what extent does bribing activity affect firm performance?”
Hypothesis Development
Figure 7 shows the hypothesized model with controls: Figure 7: Hypothesized Model with Controls
Effects of bureaucratic constraints on bribing activity and firm performance.
Bribing activity. A factor that affects level of corruption is bureaucratic constraints (Gaviria, 2002). Firms that face higher bureaucratic interference are more likely to pay bribes (Gaviria, 2002). Countries that have higher regulation have higher corruption levels (Djankov et al., 2002). Where corrupt officials arbitrarily enforce tax laws, firms can face irregular tariffs and levies (Asher & Rajan, 2001). In countries where there is weak governance, corrupt bureaucrats can create a hostile environment for companies and force them to pay extortion (Safavian et al., 2001). Under confines of bounded rationality theory, firms are more likely to participate in corruption if they face
52 bureaucratic constraints because it can be a rational choice to bribe in order to attain maximum utility (Caplan, 2006; Collins, Uhlenbruck, & Rodriguez, 2009). Per social norm theory, firms are more likely to participate in corruption because other firms will also be participating, which lowers the disutility of corruption (Dong et al., 2009). And per ethical theory, conformity bias enables firms to more readily participate in corruption as other firms do the same (Moscovici & Faucheux, 1972).
Firm performance. Bureaucratic constraints affect firm performance as well
(Kaufmann et al., 2000). A study of 1,500 Chinese firms in five cities showed that administrative hassles reduced firm growth (Hallward‐Driemeier et al., 2006). Using the
World Bank’s Business Environment and Enterprise Performance Survey to review 3,000 firms in 20 countries, it was found that bureaucratic constraints are problematic for business growth (Kaufmann et al., 2000). In a study 4,000 firms in 54 countries, it was found that the amount of time senior managers spent with regulators significantly constrained firm growth (Beck et al., 2005).
I hypothesize that:
Hypothesis 1a - Bureaucratic Constraints have a positive effect on Bribing Activity, when controlling for Firm Age and GDP per Capita.
Hypothesis 1b - Bureaucratic Constraints have a negative effect on Firm Performance, when controlling for Firm Age and GDP per Capita.
Effects of economic constraints on bribing activity and firm performance.
Bribing activity. Another factor that affects level of corruption is economic constraints (Martin et al., 2007). Firms with limited access to financial resources are more likely to engage in corruption (Martin et al., 2007). Firms with financial constraints may be more likely to use corrupt methods to get bank financing or government subsidized 53 loans (Okpara & Wynn, 2007). To reduce taxes and improve cash flow, firms will bribe tax collectors (Besley & McLaren, 1993). According to the fraud triangle theory, firms will be more likely to participate in corruption because economic constraints will bring additional financial pressures (Prabowo, 2014).
Firm performance. Economic constraints also affect firm performance (Beck et al., 2005). For example, firms that have difficulty attaining financing are less able to grow than firms that have easier access to financing (Okafor, 2017). A study of 6,000 firms found that credit constraints inhibit growth (Binks & Ennew, 1996). In a study of
1,600 small firms, it was found that growth of most firms is constrained by finance
(Carpenter & Petersen, 2002). A study of Portuguese manufacturing firms from 1990 to
2001 showed that liquidity constraints dampen firm growth (Oliveira & Fortunato, 2006).
It was found that access issues with financing for leasing equipment constrained firm growth (Beck et al., 2005). In a study of over 4,000 firms in 54 countries, it was found that financial constraints adversely affect firm growth rates (Beck et al., 2005).
Conversely, access to external funds increases firm growth, as shown by a study of
French manufacturing firms between 1996 and 2004 (Musso & Schiavo, 2008).
Therefore, I hypothesize that:
Hypothesis 2a - Economic Constraints have a positive effect on Bribing Activity, when controlling for Firm Age and GDP per Capita.
Hypothesis 2b - Economic Constraints have a negative effect on Firm Performance, when controlling for Firm Age and GDP per Capita.
Effects of legal system effectiveness on bribing activity and firm performance.
Bribing activity. A third factor that affects level of corruption is legal system effectiveness (Zhou & Peng, 2012). Firms are more likely to commit illegal acts if the 54 legal system is considered unfair (Ali & Isse, 2002). If a legal system does not work, then people can commit illegal acts without risk (Fagbemi et al., 2010). A study of the
Nigerian economy found that dysfunctional legal system contributes to systemic corruption (Ajie & Wokekoro, 2012). Conversely, strong legal systems decrease the amount of bribery that firms conduct (Zhou & Peng, 2012). Both bribe payers and bribe demanders face risk when legal systems work (Treisman, 2000). With bounded rationality, it is rational for firms to consider the risk of violating the law and to be less likely to bribe if the legal system is effective (Sethi, 1994). According to the fraud triangle theory, firms have less opportunity for corruption when legal systems are effective (Prabowo, 2014)
Firm performance. Legal system effectiveness affects firm performance (Carlin et al., 2007). In a study of over 4,000 firms in 54 countries, it was found that legal constraints adversely affected firm growth rates (Beck et al., 2005). A study of 20,000 firms in 20 countries finds that firms are constrained by legal system inadequacies (Carlin et al., 2007). Conversely, in a study of companies across thirty countries, firms in countries with high ratings for legal norm compliance were able to grow faster
(Demirgüç-Kunt & Maksimovic, 1998).
I hypothesize that:
Hypothesis 3a – Legal System Effectiveness has a negative effect on Bribing Activity, when controlling for Firm Age and GDP per Capita.
Hypothesis 3b - Legal System Effectiveness has a positive effect on Firm Performance, when controlling for Firm Age and GDP per Capita.
55 Effects of informal competition on bribing activity and firm performance.
Bribing activity. A fourth factor that affects level of corruption is informal competition (Tonoyan et al., 2010). Unregistered or informal firms function where formal institutions are weak or are not enforced (Helmke & Levitsky, 2004), which provides environments good for conducting corrupt activity (Lambsdorff, 2002; Tonoyan et al.,
2010). For example, in post-Soviet Russia, managers utilize informal norms of reciprocity (“You help me, I help you”) (Ledeneva, 1998: 185). Per fraud triangle theory, with more informal competition, firms have greater motivation to participate in corruption (Prabowo, 2014). Under social norm theory, firms are more likely to participate in corruption because other firms will also be participating, which lowers the disutility of corruption (Dong et al., 2009). And under ethical theory, since informal firms are more likely to participate in corruption (Tonoyan et al., 2010), conformity bias enables the traditional firms to more readily participate in corruption (Moscovici &
Faucheux, 1972).
Firm performance. Informal competition also affects firm performance (Ali &
Najman, 2014). Because informal firms are less regulated and less taxed than formal firms, they attain cost advantages over formal firms (Ali & Najman, 2014) and are able to undercut prices and take market share from formal firms (Ali & Najman, 2014; Schneider
& Enste, 1999). Though informal firms may be small and unproductive, they can still take market share from formal firms, especially when operating in the same market and competing for similar customers (Ali & Najman, 2014). The most affected formal firms are those that most resemble informal firms in terms of being small and having little access to finance (González & Lamanna, 2007).
56 So, I hypothesize that:
Hypothesis 4a – Informal Competition has a positive effect on Bribing Activity, when controlling for Firm Age and GDP per Capita.
Hypothesis 4b - Informal Competition has a negative effect on Firm Performance, when controlling for Firm Age and GDP per Capita.
Effects of bribing activity on firm performance. The amount of bribing activity that a firm conducts affects firm performance (Meon & Weill, 2009). From a “sand the wheels” hypothesis, it can be expected that bribing activity lowers firm performance
(Meon & Weill, 2009). Paying bribes decreased sales growth for a group of 29 Latin
American and Caribbean countries – firms that paid bribes for business transactions such as installing utility connections had a 24% lower annual sales growth than firms that did not pay these bribes (Seker & Yang, 2012). Firms from a group of 29 Latin American and
Caribbean countries that received contracts by paying bribes performed less well than firms that did not pay bribes for up to three years afterwards. Firms that paid bribes for business transactions such as for utility connections had a 24% lower annual sales growth than firms that did not pay these bribes (Seker & Yang, 2012).
Contrarily, from a “grease the wheels” hypothesis, it can be expected that bribing activity will have a positive effect on firm performance (Meon & Weill, 2009). For example, a study of 132 developing countries found that firms that bribed government officials to get things done had a 13.9 percent higher average sales growth rate than firms that did not provide bribes (Williams et al., 2016). A study of firms paying bribes in
Eastern Europe and the former Soviet Union found that firms that paid bribes to win government contracts had better firm performance than firms that did not pay bribes
57 (Hellman et al., 2003). A study of 400 Armenian firms found that the firms viewed corruption as positive for firm performance (Sahakyan & Stiegert, 2012).
Finally, I hypothesize that:
Hypothesis 5 – Bribing Activity has a positive effect on Firm Performance, when controlling for Firm Age and GDP per Capita.
Controls.
Firm age on bribing activity. Scholars have found that new firms are more likely to pay bribes because they are more likely to be victims of state capture (Rose-Ackerman,
2007). And with “liability of newness”, new firms have a greater risk of failure than older firms because they are not yet able to effectively compete against more established firms
(Freeman, Carroll, & Hannan, 1983). However, studies have also found that older firms are more likely than new firms to be corrupt. For example, a study of 4,000 firms in 41 countries found a negative correlation between firm age and firm corruption – older firms are less likely to hide output in the informal sector, which is illegal and corrupt (Dabla-
Norris, Gradstein, & Inchauste, 2008). To account for the potential effect of firm age on bribery, I added age as a control.
Firm age on firm performance. Theory suggests that older firms are less innovative and flexible and thus grow slower than younger firms (Majumdar, 1997).
Younger firms typically grow faster than older firms, especially if they are in a new niche with a rich pool or resources (Coad, 2007). Evans (1987) found that young firms are more likely than old firms to grow. An empirical study of 42,339 United States firms in
100 manufacturing industries between 1976 and 1980 found that firm growth decreased
58 with firm age (Evans, 1987). To account for the potential effect of firm age on bribery, I added age as a control.
Gross domestic product (GDP) per capita for bribing activity. As shown in
Figure 8 below, World Bank and Transparency International studies illustrate a relationship between GDP per capita and levels of corruption (Gogerty, 2014). Higher
GDP per capita is associated with lower corruption. Since I have fourteen countries in the study and there is a relationship between GDP per capita and levels of corruption, I added
GDP per capita as a control.
Figure 8: GDP per Capita versus Corruption Index
(Gogerty, 2014: 241)
GDP per capita for firm performance. Pooled data for 71 countries from 2005 to 2013 show a positive relationship between GDP per capita and corporate growth (Jwa,
2017). Since there are have fourteen countries in the study and there is a relationship between GDP per capita and corporate growth, I added GDP per capita as a control.
59 Method
Data. The WBES collects data from a stratified sample of manufacturing, retail, and service firms from 148 countries in the world (World Bank Group, 2013). This study used data for 2,956 firms in fourteen former Soviet republics. Table 5 shows the number of firms in each country:
Table 5: Countries in Study
Country N Armenia 182 Azerbaijan 75 Belarus 146 Estonia 109 Georgia 140 Kazakhstan 173 Kyrgyzstan 143 Latvia 59 Lithuania 128 Moldova 150 Russia 1,320 Tajikistan 78 Ukraine 47 Uzbekistan 206 Total 2,956
The WBES uses standardized survey instruments and uniform sampling procedures that minimizes measurement error and provides data that are comparable across countries and regions. Many quantitative studies used WBES data, which indicates that scholars place confidence in the data (Aterido & Hallward-Driemeier, 2007; Clarke,
2011; Hudson, Williams, Orviska, & Nadin, 2012; Ramdani & van Witteloostuijn, 2012).
The surveys provide detailed information on this study’s factors – Bureaucratic
60 Constraints, Economic Constraints, Legal System Effectiveness, Informal Competition,
Bribing Activity, and Firm Performance.
The data is well suited for the study of corruption. Questions on corruption are placed in different parts of the survey to reduce potential reticence from the respondents, who may think of themselves as victims of corruption rather than perpetrators of corruption (Fisman & Svensson, 2007; Ufere, 2011). Sensitive words such as
“corruption” and “tax evasion” are not used in the survey. Finally, questions relating to corruption are asked in a way that makes it easy for respondents to answer truthfully without implicating themselves as participating in illegal behavior. For example, one question is, “It is common for firms in my line of business to have to pay some irregular
“additional payments or gifts” to get things done with regard to customs, taxes, licenses, regulations, services etc.” (World Bank Group, 2013).
Participants and procedures. Participants include small firms (fewer than 20 employees) medium firms (20-99 employees), and larger firms (100 or more employees).
The sample size for the fourteen former Soviet republics, the focus of this study, is 2,956.
Of these 2,956 firms, 1,609 had fewer than 20 employees, 980 had 20-99 employees, and
367 had 100 or more employees. The firms are registered with the government and are part of the formal economy. Business owners and top managers are surveyed. World
Bank researchers, rather than government agencies or organizations associated with the government, collect the data. To ensure as much participation as possible, confidentiality of the respondents and their information is never compromised.
Measures. After reviewing the survey instrument, all construct items appeared to be reflective measures. Factors are reflective when latent constructs cause the measured
61 variables. Alternatively, factors are formative when the measured variables cause the construct (Hair, Black, Babin, & Anderson, 2010). For reflective constructs, indicators are manifestations of the construct, changes in the construct cause changes in the indicators, and indicators should share a theme. For formative constructs, however, indicators are defining characteristics of the construct, changes in the construct do not cause changes in the indicators, and indicators need not share a theme (Jarvis,
MacKenzie, & Podsakoff, 2003). Reflective factors result from the construct, and formative factors cause the construct (Edwards & Bagozzi, 2000). The unit of analysis is the firm.
Constructs. Please see Appendix F: Constructs Summary, for construct definitions and all WBES questions.
Bureaucratic Constraints are external administrative demands placed on a firm that are outside of its control. For example, a World Bank Enterprise Survey (WBES) survey question for this construct is, “To what degree is tax administration an obstacle to the current operations of this establishment?” (World Bank Group, 2013).
Economic Constraints are external economic factors that affect a firm and are outside of its control. An example WBES survey question for this construct is, “Over
2013, please estimate the proportion of this establishment’s working capital that was financed from internal funds or retained earnings.” (World Bank Group, 2013).
Legal System Effectiveness is legal system factors that affect a firm and are out of its control. An example of a WBES survey question is, “The court system is fair, impartial and uncorrupted?” (World Bank Group, 2013).
62 Informal Competition is the presence and effect of competition from unregistered or informal firms. An example question is, “Does this establishment compete against unregistered or informal firms?” (World Bank Group, 2013).
Bribing Activity is comprised of:
a) Bribing Payment (bribes paid or requested to be paid). An example question
is:
It is said that establishments are sometimes required to make gifts or informal payments to public officials to “get things done” with regard to customs, taxes, licenses, regulations, services etc. On average, what % of total annual sales, or estimated total annual value, do establishments like this one pay in informal payments or gifts to public officials for this purpose? (World Bank Group, 2013)
b) Bribing Frequency (frequency of paying bribes). For example, “Thinking
now of unofficial payments/gifts that establishments like this one would make
in a given year, please tell me how often would they make payments/gifts to
deal with customs/imports?” (World Bank Group, 2013).
c) Bribing Impact (impact of paying bribes). An example WBES question is:
It is often said that firms make unofficial payments/gifts, private payments or other benefits to public officials to gain advantages in the drafting of laws, decrees, regulations, and other binding government decisions. To what extent have the following practices had a direct impact on this establishment - private payments/gifts or other benefits to government officials to affect the content of government decrees - Private payments/gifts or other benefits to Parliamentarians to affect their votes? (World Bank Group, 2013)
Firm Performance is measured by three-year sales growth and employment growth.
Firm Age (control) is the number of years the firm has been incorporated.
GDP per Capita (control) is in 2013 US Dollars. 63 Analyses
I analyzed WBES data to determine the extent that bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition affect bribing activity and firm performance. I also used WBES data to determine the extent that bribing activity affects firm performance (please see Appendix F: Constructs Summary, for definitions of factors).
To ensure that the data for this study was adequate, reliable, and valid, the data was screened for missing data, “Null” responses, and low variance (Hair et al., 2010).
Finally, an exploratory factor analysis (EFA), confirmatory factor analysis (CFA), and structural equation model (SEM) were conducted.
Data screening. First, items were examined for variance, and no items that had variance less than 0.1 were removed. Then, items were examined for the presence of
“Null”, “Refuse to Answer”, “Does not apply”, and “Don’t know”. 219 items with more than 50% combined of “Null”, “Refuse to Answer”, “Does not apply”, and “Don’t know” were removed, leaving 135 items that could be analyzed.
Then, a dataset of 9,550 individual firms were examined for missing data.
Removed were 2,374 firms that had no current sales figures, 1,921 firms that had no three-year sales figures, 7 firms that had no current employee figures, 181 firms that had no three-year employee figures, 1,387 firms that had more than one missing response for all the questions on Bribing Impact plus Bribing Frequency, and 724 firms that had no data for the question,
It is said that establishments are sometimes required to make gifts or informal payments to public officials to “get things done” with regard to customs, taxes, licenses, regulations, services etc. On average, what % of
64 total annual sales, or estimated total annual value, do establishments like this one pay in informal payments or gifts to public officials for this purpose? (World Bank Group, 2013)
This left 2,956 firms to be analyzed. Missing data for these firms (6.5% of total data) were imputed in SPSS with median of nearby points. Data for two items, Sales
Growth and Employment Growth, were transformed to square root to make their values less skewed and more normal (Hair et al., 2010).
EFA. An EFA was conducted using SPSS to assess if the observed variables loaded together as expected, were adequately correlated, and met criteria of reliability and validity (Hair et al., 2010). From the World Bank Enterprise Survey, 30 items were chosen across seven factors based on theory. Eighteen items loaded cleanly into the seven factors (Bribing Payment, Bribing Impact, Bribing Frequency, Economic Constraints,
Bureaucratic Constraints, Legal System Effectiveness, and Informal Competition) shown in the Pattern Matrix of Appendix G. There were no cross loadings, low factor values, or low communalities. There were no Heywood cases or loadings over 1.0.
Sampling adequacy was evidenced by a KMO (Kaiser-Meyer-Olkin) Measure of
Sampling Adequacy of 0.759, which is beyond the 0.50 threshold suggested by (Hair et al., 2010). Bartlett’s test for sphericity fell within the good range and is significant 0.000.
The Bartlett’s test is to test the Null hypothesis that the correlation matrix is an identity matrix. For reproduced correlation, nonredundant residuals with absolute values greater than 0.05 equal 0.0%. This is good since 4% or less is desirable (Cheung & Rensvold,
2002). The communalities for all variables ranged from .202 to 0.820, with three variables being less than the 0.3 threshold.
65 The EFA examined patterns for the large number of items and determined how they could be condensed into a smaller set of factors. Principal Axis Factoring extraction method was used to examine the factor structure with eigen values greater than 1 (Cliff,
1998). Promax Rotation was used, with maximum iterations for Convergence of 25
(Fabrigar, Wegener, MacCallum, & Strahan, 1999).
All factors were reliable or close to reliable. Cronbach’s alpha coefficients, the most widely used measure of reliability, should be ≥0.7 (Nunnally & Bernstein, 1994), the standard set for this study. The Pattern Matrix contains Cronbach’s alphas, and provides support for reliability as well as convergent validity, with all loadings, being higher than necessary for this sample size (Hair et al., 2010). Cronbach’s alphas for factors were as follows: Bribing Frequency=0.874, Bribing Impact=0.943, Bribing
Payment=0.831, Legal System Effectiveness=0.792, Economic Constraints=0.564,
Informal Competition=0.559, and Bureaucratic Constraints=0.570. Discriminant validity is evidenced by no cross-loadings less than 0.2.
Convergent validity was established by verifying that all the items loaded above
0.50 and were significant (Hair et al., 2010). Discriminate validity was assessed via an observance of no cross loadings on the pattern matrix (Hair et al., 2010).
The total variance explained by the model was 78.21%, with all factors (N=7) being higher than a 1.0 eigen value. Consequently, the model was advanced for CFA.
CFA. Using AMOS 25.0, 20 items comprising eight factors (Bribing Payment,
Bribing Impact, Bribing Frequency, Economic Constraints, Bureaucratic Constraints,
Legal System Effectiveness, Informal Competition, and the dependent factor Firm
Performance) were submitted for CFA to verify that the factor structure was valid and
66 reliable. The CFA revealed that the model had adequate fit: CMIN=595.90, DF=142,
CMIN/DF=4.196, GFI=0.980, AGFI=0.970, CFI=0.982, RMSEA=0.033, Pclose=1.000, and SRMR=0.026 (Carmines & McIver, 1981; Hooper, Coughlan, & Mullen, 2008; Hu
& Bentler, 1999; MacCallum, Browne, & Sugawara, 1996).
Composite reliability was confirmed for six of the eight factors, Bribing
Frequency=0.876, Bribing Impact=0.944, Bribing Payment=0.861, Economic
Constraints=0.733, Legal System Effectiveness=0.795, and Informal Competition=0.769.
These factors had critical ratios (CR) over 0.70 (Hair et al., 2010). The CR of two factors,
Bureaucratic Constraints=0.600 and Firm Performance=0.470 were less than 0.70.
Convergent validity was demonstrated for six of the eight factors, which had Average
Variance Extracted (AVE) greater than 0.50 (Hair et al., 2010). These factors were
Bribing Frequency=0.703, Bribing Impact=0.849, Bribing Payment=0.757, Economic
Constraints=0.539, Legal System Effectiveness=0.565, and Informal Competition=0.632.
The AVE of two factors, Bureaucratic Constraints=0.438 and Firm Performance=0.323, were less than 0.50. Discriminant validity was shown for all eight factors, with AVE greater than Maximum Shared Values (MSV) for each factor (Hair et al., 2010). Table 6 shows results of reliability, convergent and discriminate validity testing:
67 Table 6: Result of Reliability, Convergent and Discriminate Validity Testing
Bribing Legal System Economic Bribing Bureaucratic Bribing Firm Informal CR AVE MSV Impact Effectiveness Constraints Frequency Constraints Payment Performance Competition Bribing Impact 0.944 0.849 0.252 0.921 Legal System Effectiveness 0.795 0.565 0.079 -0.172*** 0.752 Economic Constraints 0.773 0.539 0.014 0.02 0.027 0.734 Bribing Frequency 0.876 0.703 0.252 0.502*** -0.175*** -0.029 0.838 Bureaucratic Constraints 0.600 0.438 0.099 0.163*** -0.281*** -0.118*** 0.312*** 0.662 Bribing Payment 0.861 0.757 0.099 0.176*** -0.234*** -0.002 0.310*** 0.315*** 0.87 Firm Performance 0.470 0.323 0.012 0.034 0.060* -0.057* 0.034 0.042 0.006 0.568 Informal Competition 0.769 0.632 0.048 0.099*** -0.168*** -0.050* 0.128*** 0.217*** 0.219*** -0.111*** 0.795 * p < 0.050, ** p < 0.010, *** p < 0.001
I did a common method bias test with a model including a marker variable with four items – percent (reversed) land owned, percent land rented or leased, percent
(reversed) buildings owned, and percent buildings rented or leased. Please see Appendix
H for the AMOS Common Method Bias with marker variables model. I compared the unconstrained model to the equally constrained and zero constrained models. For the unconstrained model, DF=215 and χ2 = 10,101.2. For the equally constrained model,
DF=234 and χ2 = 10,327.3, and for the zero constrained model, DF=235 and χ2 =
10,336.6. I found that there is Common Method Bias – the P value was equal to 0.00, less than the threshold of 0.05 (Podsakoff, MacKenzie, & Podsakoff, 2012).
Because I had common method bias, I retained the model by imputing composites in AMOS 25.0 with the marker variable present, thus generating a common method bias adjusted factor values which accounted for the method bias within all 8 factor scores. I used these imputed results for the structural analysis. Table 7 shows the correlation matrix of the factors.
68 Table 7: Correlation Matrix
Correlations Standard Bureaucratic Economic Legal System Informal Bribing Firm Factor Mean Deviation Constraints Constraints Effectiveness Competition Activity Performance Bureaucratic Constraints 0.537 0.601 1.000 Economic Constraints 74.845 18.168 -.166** 1.000 Legal System Effectiveness 1.803 0.668 -.427** 0.032 1.000 Informal Competition 0.919 1.221 .297** -.049** -.170** 1.000 Bribing Activity 1.437 0.810 .380** (0.026) -.225** .137** 1.000 Firm Performance 0.585 1.398 0.027 -.078** .088** -.152** .049** 1.000 **. Correlation is significant at the 0.01 level (2-tailed)
Findings
The hypothesized relationships between the factors were tested using Structural
Equation Modeling (SEM) techniques in AMOS 25.0. Model fit measures were:
CMIN=15.499, DF=8, CMIN/DF=1.937, GFI=0.999, AGFI=0.994, CFI=0.997,
RMSEA=0.018, Pclose=1.000, and SRMR=0.0135. Figure 8 shows SEM results:
Figure 9: Model with Standardized Estimates (Betas)
Test of direct effects. I tested the direct effect of Bureaucratic Constraints on
Bribing Activity and found there was a significant effect (0.45, p<.001). Therefore, H1a 69 (Bureaucratic Constraints have a positive effect on Bribing Activity) is supported. There is a positive relationship between the level of bureaucracy and the amount of bribing activity. I tested the direct effect of m Bureaucratic Constraints on Firm Performance and found there was a significant effect (0.05, p=.02). So, H1b, (Bureaucratic Constraints have a negative effect on Firm Performance) is supported, showing that bureaucratic constraints reduce firm performance.
I tested the direct effect of Economic Constraints on Bribing Activity and found there was a significant effect (0.07, p<.001). H2a, (Economic Constraints have a positive effect on Bribing Activity) is supported. There is a positive relationship between external economic factors and the amount of bribing activity. I tested the direct effect of
Economic Constraints on Firm Performance, and found there was a significant effect (-
0.08, p<.001). So, H2b, (Economic Constraints have a negative effect on Firm
Performance) is supported, showing there is a negative relationship between external economic factors and firm performance.
I tested the direct effect of Legal System Effectiveness on Bribing Activity and found there was a significant effect (-0.17, p<.001). Therefore, H3a (Legal System
Effectiveness has a negative effect on Bribing Activity) is supported. There is a negative relationship between how well the legal system functions and the amount of bribing activity. I tested the direct effect of Legal System Effectiveness on Firm Performance and found there was a significant effect (0.13, p<.001). So, H3b, (Legal System Effectiveness has a positive effect on Firm Performance) is supported, and there is a positive relationship between how well the legal system functions and sales growth.
70 I tested the direct effect of Informal Competition on Bribing Activity and found that there was a significant effect (0.06, p<.001). So, H4a, (Informal Competition has a positive effect on Bribing Activity) is supported. There is a positive relationship between informal competition and bribing activity. I tested the direct effect between Informal
Competition and Firm Performance and found that there was a significant effect (-0.17, p<.001). H4b, (Informal Competition has a negative effect on Bribing Activity) is supported. There is a negative relationship between informal competition and firm performance.
Finally, I tested the direct effect of Bribing Activity on Firm Performance and found that there was a significant effect (0.11, p<.001). So, supported is the hypothesis,
H5, (Bribing Activity has a positive effect on Firm Performance). Bribing activity positively effects firm performance.
Table 8 summarizes Hypotheses results from the SEM:
Table 8: Hypotheses Summary
Standard Regression Hypothesis Direct Weight P Value Support H1a Bureaucratic Constraints have a positive effect on Bribing Activity 0.446 *** Yes H1b Bureaucratic Constraints have a negative effect on Firm Performance 0.054 0.02 Yes H2a Economic Constraints have a positive effect on Bribing Activity 0.066 *** Yes H2b Economic Constraints have a negative effect on Firm Performance -0.083 *** Yes H3a Legal System Effectiveness has a negative effect on Bribing Activity -0.165 *** Yes H3b Legal System Effectiveness has a positive effect on Firm Performance 0.129 *** Yes H4a Informal Competition has a positive effect on Bribing Activity 0.061 *** Yes H4b Informal Competition has a negative effect on Firm Performance -0.174 *** Yes H5 Bribing Activity has a positive effect on Firm Performance 0.105 *** Yes
71 Discussion
I addressed the research question: In the former Soviet republics, to what extent do bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition affect bribing activity and to what extent does bribing activity affect firm performance? The findings address a gap in the literature, which is the dearth of studies addressing firm level corruption in the former Soviet republics.
Regarding bribing activity, the findings support extant theory. Bureaucratic constraints, economic constraints, and informal competition have significant direct positive impacts on bribing activity, while legal system effectiveness has a significant direct negative impact. This aligns with studies that show that firms that face higher bureaucratic interference are more likely to pay bribes (Asher & Rajan, 2001; Djankov et al., 2002; Gaviria, 2002; Safavian et al., 2001), with studies that show that firms with limited access to financial resources are more likely to engage in corruption (Besley &
McLaren, 1993; Martin et al., 2007; Okpara & Wynn, 2007), with studies that have shown that bribery is more likely to occur when firms compete with informal firms
(Helmke & Levitsky, 2004; Lambsdorff, 2002; Tonoyan et al., 2010), and with studies that show that strong legal systems decrease the amount of bribery that firms conduct
(Zhou & Peng, 2012). This also aligns with bounded rationality theory (Simon, 1972).
The rationality of firms is bounded by available information and amount of time. When constrained by obstacles such as business licensing permits, tax administration, and labor regulations, firms take into account uncertainty and the risk of violating the law to decide if bribing is an effective solution. This finding also aligns with fraud triangle theory – economic constraints and informal competition add pressure, which motivates executives
72 to decide to bribe. Conversely, increased legal system effectiveness reduces opportunity for corruption (Prabowo, 2014). And as the bribing activity becomes prevalent, social norm theory suggests that firms would be more prone to be corrupt as well (Dong et al.,
2009). And under ethical theory, conformity bias enables firms to more readily participate in corruption (Moscovici & Faucheux, 1972).
Regarding firm performance, the findings also support extant theory. Bureaucratic constraints, economic constraints and informal competition have significant direct negative impacts on firm performance, while legal system effectiveness has a significant direct positive impact. This aligns with studies that show bureaucratic constraints constrain firm growth (Beck et al., 2005; Hallward‐Driemeier et al., 2006; Kaufmann et al., 2000), that difficulty obtaining financing lowers firm performance (Beck et al., 2005;
Binks & Ennew, 1996; Carpenter & Petersen, 2002; Musso & Schiavo, 2008; Okafor,
2017; Oliveira & Fortunato, 2006), that firm performance is dampened by informal competition (Ali & Najman, 2014; Schneider & Enste, 1999), and that firms in countries with high ratings for legal norm compliance are able to grow faster (Demirgüç-Kunt &
Maksimovic, 1998).
Finally, the findings show that bribing activity has a positive effect on firm performance. This does not support the “sand the wheels” hypothesis (Meon & Weill,
2009) and studies that illustrate that bribing activity lowers firm performance (Zhou &
Peng, 2012). This challenges the “moral” theory that bribery is harmful (Williams et al.,
2016). However, while participation in corruption may benefit firms, it does not benefit countries. Bribery is not a beneficial strategy at the country level. Corruption creates uncertainty, inefficiency, lower tax revenue, increases income distribution, lowers foreign
73 direct investment, and leads to other forms of crimes (Djankov et al., 2002; Gupta et al.,
1998; Shleifer & Vishny, 1993).
The findings do support the alternative “grease the wheels” hypothesis (Meon &
Weill, 2009) and studies that illustrate the positive effect of bribing on firm performance
(Hellman et al., 2003; Sahakyan & Stiegert, 2012; Williams & Martinez-Perez, 2016).
Firm executives utilize rational choice, and it makes economic sense for firms to participate in corruption (Prabowo, 2014). In the former Soviet states studied in this paper, firm managers may have found that bribing helped address issues such as bureaucratic slowness and unresponsiveness (Lui, 1985). Engaging in corruption may have compensated for inefficient institutions (Williams & Martinez-Perez, 2016).
Because the findings support extant theory, this study fills a gap created by the dearth of research addressing firm level corruption in the former Soviet republics. Using a model similar to that developed in other corruption studies, the study delved into the former Soviet republics, which are of great interest because of the region’s history with corruption, its new governments, its transition from planned economy to market economy, and its current high levels of corruption. Confirming that at the firm level, bribing activity is affected by outside constraints and that bribing activity effects firm performance has important implications.
Summary of Quantitative Study
This study offers insights to scholars of the literature on corruption, to policy makers, and to practitioners on pragmatic methods for reducing corruption and enhancing firm performance. It shows that bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition have a significant impact on bribing
74 activity and firm performance. It is in the interest of all countries to reduce bribing and to increase firm performance. Reducing bureaucratic constraints, reducing economic constraints, increasing legal system effectiveness, and reducing informal competition can yield these effects.
The study also shows that there is a significant positive impact between bribing activity and firm performance. Firms undergo risk, effort, and expense to bribe, and they do so only if it makes rational economic sense. This paper makes the distinctive point that policy makers need to recognize that even though corruption is bad for countries, it can be good for individual firms. As such, policy makers and practitioners need to focus on individuals. They can reduce bribing activity by changing the cost benefit ratio through making costs of bribing higher and benefits of bribing lower. Costs can be raised by increasing the likelihood that infractions are caught by governments and firms, and by increasing the penalties, such as jail time or job termination, for the infractions. Benefits can be lowered by reducing trust in government officials through implementing staff rotations in bureaucracies. In addition, policy makers and practitioners should work to align the values of executives with the laws and regulations for bribery.
75 CHAPTER 5: WHAT MOTIVATES PARTICIPATING IN CORRUPTION AND HOW DOES SUCH PARTICIPATION AFFECT FIRM PERFORMANCE?
Introduction
What motivates local executives to participate in corruption, to what extent do external factors such as bureaucratic and economic constraints affect bribing activity, and how does bribing activity affect firm performance? To answer this question, I utilized embedded mixed methods. I interviewed local executives in Kyrgyzstan and Georgia and used the findings to provide interpretive validity and reliability to quantitative findings derived from World Bank Enterprise Survey data. Interestingly, many findings from the qualitative interviews were different from quantitative findings. Interviews indicated that informal competition had no effect on bribing activity or firm performance, whereas quantitative analysis indicated that informal competition did have a small but statistically meaningful effect. Findings from the interviews also complemented findings from the past literature. In particular, my interviews indicated that bribing helps firm performance.
This supports a “grease the wheels” hypothesis and runs counter to a “sand the wheels” hypothesis. The findings help us understand what motivates local executives in corrupt settings to make decisions about participating in corruption. The study also provides insights into nascent literature on corruption and into policy makers and practitioners on methods for reducing corruption.
The problem of practice in this study is, “The difficulty of firm executives to uphold ethical integrity when operating in corrupt countries.” The specific research questions are: “1) What motivates local executives in Kyrgyzstan and Georgia to decide whether to participate in corruption, 2) to what extent do present bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition as perceived 76 by the local executives influence their reasoning that shapes their participation in corrupt behaviors, and 3) how does such participation affect their firm’s performance?”
Method
To address the research questions this study applies mixed method design. It specifically uses an embedded design containing a concurrent quantitative strand and qualitative strand (Creswell & Plano Clark, 2007; Teddlie & Tashakkori, 2009). The study uses a fixed design, with the method being determined beforehand. The use of mixed methods is motivated by the need to triangulate, to obtain complementary perspectives, and to explain potential contradictions between quantitative and qualitative findings (Creswell & Plano Clark, 2007; Teddlie & Tashakkori, 2009). Overall, the embedded design used in the study is designated as “quan+QUAL” design.
The study explains, expands, and interprets findings of the quantitative strand. It explores in particular what reinforces, stimulates, and shapes executive’s behaviors. This helps answer how different kinds of corrupt behaviors are manifested in sampled settings.
Per the figure below, I used a concurrent triangulation design and used both strands to look at the same aspects from different angles. This can overcome the bias from using just one method, improve the reliability of the findings, and provide better validity and reliability of the findings (Creswell & Plano Clark, 2007; Teddlie & Tashakkori, 2009).
77 Figure 10: Concurrent Embedded Design
The study endeavors to answer the research questions: 1) What motivates local executives in Kyrgyzstan and Georgia to decide whether to participate in corruption, 2) to what extent do present bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition as perceived by the local executives influence their reasoning that shapes their participation in corrupt behaviors, and 3) how does such participation affect their firm’s performance?
Georgia and Kyrgyzstan are well suited for corruption study. Per the
Transparency International 2018 ranking, Kyrgyzstan was more corrupt than 73% of 180 ranked countries, while Georgia was more corrupt than just 23% of 180 ranked countries.
The remaining 13 former Soviet Republics were also more corrupt than 60% of 180 ranked countries (Transparency International, 2018) (see the figure in Appendix I).
Corruption was endemic across the Soviet Union (Litwack, 1991). One executive
I interviewed said, “It started at birth. You gave from birth to death. At kindergarten students give cards to teachers. You gave at births, school, weddings, jobs, funerals.”
78 This Soviet tradition of giving was a deeply ingrained social acceptance of the practice carried over to the former Soviet republics when they became independent in 1991.
In Kyrgyzstan, little had changed regarding corruption since the country attained independence in 1991 (Cokgezen, 2004). Though a strong legal framework existed, it was not effective at having people adhere to the law (Bleck & Logvinenko, 2018).
Georgia was also highly corrupt after independence in 1991 (Light, 2014). In
2003, before its Rose Revolution, Georgia was 133rd least corrupt country in the world
(Transparency International, 2003). “Thieves in Law” were the most powerful mafia in the former Soviet Union (Kukhianidze, 2009; Nordin & Glonti, 2006). As one executive stated, “Before Rose Revolution, bribing was every day at every level.” After the Rose
Revolution, the national government made dramatic changes to reduce corruption
(Cornell & Nilsson, 2009; Lanskoy & Areshidze, 2008). By 2018, Georgia had improved to being the 41st least corrupt country in the world (Transparency International, 2018).
Quantitative data. The World Bank Enterprise Surveys (WBES) collects data from a stratified sample of manufacturing, retail, and service firms from 148 countries in the world (World Bank Group, 2013). This study used data from 2013 for 143 firms in
Kyrgyzstan and 140 firms in Georgia.
The WBES uses standardized survey instruments and uniform sampling procedures that minimize measurement error and provide data that are comparable across countries and regions. Many quantitative studies used WBES data, which indicates that scholars place confidence in the data (Aterido & Hallward-Driemeier, 2007; Clarke,
2011; Hudson et al., 2012; Ramdani & van Witteloostuijn, 2012). The surveys provide detailed information on this study’s factors – Bureaucratic Constraints, Economic
79 Constraints, Legal System Effectiveness, Informal Competition, Bribing Activity, and
Firm Performance.
The data is well suited for the study of corruption. Questions on corruption are placed in different parts of the survey to reduce potential reticence from the respondents, who may think of themselves as victims of corruption rather than perpetrators of corruption (Fisman & Svensson, 2007; Ufere, 2011). Sensitive words such as
“corruption” and “tax evasion” are not used in the survey. Finally, questions relating to corruption are asked in a way that makes it easy for respondents to answer truthfully without implicating themselves as participating in illegal behavior. For example, one question is, “It is common for firms in my line of business to have to pay some irregular
‘additional payments or gifts’ to get things done with regard to customs, taxes, licenses, regulations, services etc.” (World Bank Group, 2013).
Quantitative sample. Participants include small firms (fewer than 20 employees) medium firms (20-99 employees), and larger firms (100 or more employees). The firms are registered with the government and are part of the formal economy. Business owners and top managers are surveyed. World Bank researchers, rather than government agencies or organizations associated with the government, collect the data. To ensure as much participation as possible, confidentiality of the respondents and their information is never compromised.
Qualitative sample. Interviews were conducted in-country with 21 local executives who have lived and worked for local companies in Kyrgyzstan and the
Republic of Georgia. Ten interviews were conducted in Kyrgyzstan and eleven in
Georgia. I arranged for business people with good connections in both countries to
80 schedule the interviews. To get a purposeful sample, I built a group who 1) were owners or CEOs of firms up to 1000 employees or were VPs with decision making authority at firms over 1000 employees, 2) had been in the current role for longer than 1 year, 3) represented different sectors in manufacturing and services, 4) represented different sizes of firms, 5) represented firms that had been operating for at least three years, and 6) were available and receptive to participate in this research by engaging in the interview. All executives had significant decision-making authority. Executives at companies with fewer than 1,000 employees had profit and loss authority. At companies with more than
1,000 employees, the executives were department heads for a function such as finance or operations. No interviews were conducted with more than one individual from any one organization. None of the potential participants had a reporting relationship with me in any way. Appendix J illustrates characteristics of the firms and interviewees, such as gender, age of interviewee, industry, size of company, and age of company.
Qualitative data collection. Interviews were conducted in May, 2019. Semi- structured interviews of approximately one hour were guided by an interview protocol.
All interviews were conducted face-to-face. In Kyrgyzstan, an interpreter helped with 8 of 10 interviews. In Georgia, an interpreter helped with 6 of the 11 interviews. Interviews were conducted at the interviewees’ place of work or at local coffee shops. During each interview, I took careful notes by hand on paper. After each interview, I immediately summarized my notes into a Word document. To ensure anonymity, names of people, schools, and companies were removed. (Please see Appendix K: Interview Protocol, for the interview protocol that was used). Participants were advised that their names would not be shared with anyone and that the information they provided would be kept
81 confidential. Participants were told that they could exit the interview at any time and that any data collected up to that point in the interview would be destroyed and not used as part of the research. No participants felt a need to exercise this option, and all participants completed their interviews.
Measures. For the quantitative strand, the unit of analysis was the firm. For the qualitative strand, the units of measurement were the country (Kyrgyzstan and Georgia) and the individual executive (the people I interviewed). After reviewing the survey instrument, all construct items appeared to be reflective measures. Factors are reflective when latent constructs cause the measured variables. Alternatively, factors are formative when the measured variables cause the construct (Hair et al., 2010). For reflective constructs, indicators are manifestations of the construct, changes in the construct cause changes in the indicators, and indicators should share a theme. For formative constructs, however, indicators are defining characteristics of the construct, changes in the construct do not cause changes in the indicators, and indicators need not share a theme (Jarvis et al., 2003). Reflective factors result from the construct, and formative factors cause the construct (Edwards & Bagozzi, 2000).
Data analysis. The quantitative strand uses the same data set as used in the previous quantitative study of 14 former Soviet republics (Greppin, Ufere, & Wang,
2019). Using a multigroup analysis, it compares the levels and antecedents of firm level corrupt behaviors between Kyrgyzstan and Georgia. Invariance tests showed that there was invariance at the configural level indicating both groups have the same basic factor structure, (Hair et al., 2010). There was partial invariance at the metric level.
82 The qualitative strand employs semi-structured interviews to reveal and analyze past experiences of individuals about why they committed or not to corrupt behaviors.
The study relies on the inductive approach by focusing on executives’ actual experiences of corruption (Maxwell, 2013), by coding their reported accounts of corrupt behaviors and settings in order to identify key themes and knowledge that generally guide executives’ participation in corrupt behaviors. I compiled relevant quotes, examples of corruption, and preliminary findings. Then, for each of 54 incidents of corruption, I coded for antecedents, behavior, motivations, and outcomes. I coded each incident based on whether there were examples of participating in corruption or examples of not participating in corruption; whether they were first hand (personally experienced), second hand (experienced by a colleague, friend, or relative), or general examples that were public knowledge that could be found in open sources; whether they applied to bureaucratic constraints, economic constraints, legal system effectiveness, or informal competition; and how they affected participation in corruption and how such participation affected firm performance. I tallied the coded examples by criteria such as gender, industry, and role at company. I used the examples to find differences between Georgia and Kyrgyzstan, perspectives on constraints that affect level of participation in corruption, and comparisons of interview results with results from the previous quantitative study.
In the integration, I looked for both convergence and divergence. I used the qualitative strand results to pursue convergence and corroboration with the quantitative strand results. The two strands were simultaneous, with the results coming from triangulation.
83 Findings
The interviews with the 10 executives in Kyrgyzstan and 11 executives in Georgia provide relevant perspectives that help answer the research questions: 1) What motivates local executives in Kyrgyzstan and Georgia to decide whether to participate in corruption, 2) to what extent do present bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition as perceived by the local executives influence their reasoning that shapes their participation in corrupt behaviors, and 3) how does such participation affect their firm’s performance? The perspectives provide information on local motivations for participating in corruption or not participating in corruption, on corruption within the two countries, on how external constraints affect bribing activity and firm performance in the two countries, and on differences in corruption between the two countries. This section shows findings on these perspectives.
It also shows results of a chi square difference test for the quantitative analysis and quantitative findings.
Kyrgyzstan findings.
Kyrgyzstan quantitative results. The figure below provides a graphical illustration of Kyrgyzstan results for the quantitative study:
84 Figure 11: Kyrgyzstan Structural Equation Model
The figure shows that few of the relationships are significant. Only the relationships between bureaucratic constraints and bribing activity, and between informal competition and firm performance, are significant. This may be explained by the small sample sizes of n=143.
Kyrgyzstan quantitative study versus qualitative study. The qualitative study revealed perspectives about how bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition affected participation in corruption and affected firm performance, and how participation in bribing activity affected firm performance. Interestingly, many findings are not consistent between the quantitative study and the interviews. The table below compares findings from the quantitative study and findings from the interviews conducted in Kyrgyzstan. Overall, 3 of 9 findings were similar and 6 of 9 findings were different: 85 Table 9: Comparison of Kyrgyzstan Quantitative Results and Interview Findings
Quantitative Finding Quantitative Presence & Interview Revealed Results Regression P- Significant by Interview Similar/ Effect - Kyrgyzstan Weight Value Yes/No Yes/No Different Effects of bribing activity on firm performance 0.12 0.16 No Yes Different Effects of bureaucratic constraints on bribing activity 0.35 *** Yes Yes Similar Effects of bureaucratic constraints on firm performance 0.17 0.09 Yes Yes Similar Effects of economic constraints on bribing activity -0.04 0.64 No Yes Different Effects of economic constraints on firm performance -0.02 0.84 No Yes Different Effects of legal system effectiveness on bribing activity -0.03 0.75 No Yes Different Effects of legal system effectiveness on firm performance 0.04 0.64 No Yes Different Effects of informal competition on bribing activity 0.06 0.43 No No Similar Effects of informal competition on firm performance -0.13 0.10 Yes No Different
For the 3 similar relationships, 2 had significant relationships for the quantitative study and also a presence revealed by the interviews – effects of bureaucratic constraints on bribing activity and effects of bureaucratic constraints on firm performance. The other similar relationship had no significant relationships for the quantitative study and no presence revealed by the interviews – the effects of informal competition on bribing activity.
For the 6 different relationships, 5 were because the interviews indicated there was a relationship present, but the quantitative study indicated there was not a significant effect. Interviewees stated that bribing activity had positive effect on firm performance, but the quantitative study did not show there was a statistically significant effect.
Interviewees stated that economic constraints had a positive effect on bribing activity and a negative effect on firm performance, but the quantitative study did not show there was a statistically significant effect. Interviewees stated that legal system effectiveness had a positive effect on bribing activity and a negative effect on firm performance, but the
86 quantitative study did not show there was a statistically significant effect. Reasons for these differences are discussed below in the Discussion section.
One different relationship occurred because the interviews indicated there was not a relationship, but the quantitative study indicated there was a significant effect.
Interviewees stated that informal competition did not have positive effects on firm performance, but the quantitative study showed there was a statistically significant effect.
Reasons for this difference are also discussed in the Discussion section.
Perspectives on constraints that affect corruption participation in
Kyrgyzstan. In addition to providing examples of participating in corruption and not participating in corruption, the interviewees also provided perspectives on how bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition shaped reasoning around corruption and thereby affected participation in corruption, how such participation was perceived to affect firm performance, and why people decided to bribe. These perspectives directly address the research questions. The table below summarizes findings around these topics.
87 Table 10: Summary of Perspectives on Constraints in Kyrgyzstan
What Interviewees Say About What Interviewees Think About Why Constraint Constraints People Decide to Bribe Bureaucratic constraints are a large driver of - Are many legacy regulations which are corruption. People bribe to avoid outdated no longer applicable regulations, to cut through red tape, and to speed Bureaucratic - Red tape causes delays which need to up decisions: Constraints be sped up "Bribes are to get things done.” - Tax inspections take a long time to be "Terraces for restaurants are not allowed processed but people want them and pay to have them." - Salaries are too low for government Economic constraints are a large driver of workers so they are forced to seek corruption. People bribe to mitigate the bribes economic constraints: Economic - Hard to borrow so people forced to "We got the $5million loan because of a Constraints raise money from friends and family close personal connection and gifts to the - Local banks have high interest rates loan officer." - If have debt in USD it is difficult "He bribed to get a privileged rate from the because exchange rate keeps dropping Russian-Kyrgyz Development Fund." Legal system effectiveness is a large driver of - Judiciary is not independent and is Legal System corruption. People bribe to get better decisions corrupt Effectiveness and to circumvent outdated laws: - Laws are outdated “I pay to get better decisions. To speed up.” - Informal firms do not exist - Informal firms provide no competition Informal competition is not a driver of to formal firms corruption. People do not need to bribe to Informal - Informal firms have no effect on how address issues with informal competition: Competition formal firms operate "Informal competition is not an issue. All - Informal firms do not affect bribing firms are registered." activity of firm performance Bribery helps firm performance. People bribe to Bribery -> - Don’t grow as fast if you don't bribe garner revenue and to make their firms grow: Firm - Don't get as much revenue if you don't "A firm paid a 7% bribe to get an award for Performance bribe building a $1 million school.
According to the interviewees in Kyrgyzstan, bureaucratic constraints were a large driver of corruption. Red tape caused delays which needed to be reduced through bribing, there were many legacy regulations which were no longer applicable and needed to be circumvented, and tax inspections took a long time to be processed unless they were sped up through bribery. These bureaucratic constraints encouraged the supply side of
88 corruption, and people decided to bribe to avoid outdated regulations, to cut through red tape, and to speed up decisions. As one interviewee said, “Bribes are to get things done.”
Economic constraints also contributed to people participating in corruption.
Salaries for government workers were very low, and workers sought bribes to supplement their incomes. This increased the demand side of corruption and people decided to bribe to mitigate the economic constraints. For example, people bribed loan officers to get loans at low interest rates. On executive said of an associate, “He bribed to get a privileged rate from the Russian-Kyrgyz Development Fund."
The legal system also contributed to corrupt activity. The judiciary was not independent and was corrupt, and laws were outdated. People decided to bribe to get better decisions. One executive said, “I pay to get better decisions. To speed up.” People also pay to circumvent outdated laws. For example, national law states that food cannot be prepared in the room in which people eat. However, many restaurants, such as sushi bars, prepare and serve in the same room by custom, and bribe to operate illegally.
According to the executives, informal firms did not exist, they provided no competition to formal firms, and they had no effect on how formal firms operated. They did not affect either bribing activity or firm performance. "Informal competition is not an issue. All firms are registered."
Interviewees stated that firms that do not bribe do not grow as fast or get as much revenue as firms that do bribe. People decided to bribe to make their firms grow. One executive described a colleague’s action, "He gave a 7% bribe to get the government contract for building the school." No other factors, such as infrastructure or political unrest, emerged as factors that affected corruption.
89 Differences and clusters of examples within Kyrgyzstan. For each interviewee,
I categorized examples by whether they were first hand or second hand, and whether they were about participating in corruption or about not participating in corruption. Appendix
L illustrates the examples in Kyrgyzstan stratified by criteria. Since the sample size of
Kyrgyzstan interviewees is small with n=10, no valid inferences can be made to the population (Hair et al., 2010). However, the table below does illustrate findings with relevant quotes and observations:
For the first finding, that interviewees that had higher levels of trust in the interviews provided most examples of participating in corruption, it stands to reason that people would be more likely to provide examples of participating in corruption if they trusted the interviewer. Evidently, some executives trusted me a great deal, as they described first hand examples of participating in corruption. The second finding, that there were more participating in corruption examples (20) than not participating in corruption examples (6), may reflect the nature of activity in Kyrgyzstan, with people choosing to participate in corruption more than choosing to not participate in corruption.
The third finding, that most examples of participating plus not participating were for levels of corruption in the middle range of $100 to $100,000, with the second most number of examples being from the high range of greater than $100,000, may simply reflect the levels of corruption that generally occur in Kyrgyz business. The fourth finding, that interviewees at smaller companies and interviewees with only a bachelor's education provided more examples of not participating in corruption than those at larger companies, may have been affected by social desirability bias (Grimm, 2010). The people at the smaller companies and the people with only a bachelor's education may have felt
90 less established than other interviewees and may have thought that I, as a Westerner, would respect them for offering examples of not participating in corruption. For the fifth finding, that there was no meaningful difference by gender, industry, role at company, age of company, age of interviewee, whether an interviewee had Western education, or whether an interpreter was used, could be simply because the sample size of 10 was too small to provide meaningful differences.
Table 11: Findings and Explanations in Kyrgyzstan
Finding Explanation Interviewees that had higher levels of trust in the interviews provided most examples of participating in corruption. Since participating in corruption is illegal, it "A firm paid a 7% bribe to get an award for building a stands to reason that interviewees would be 1 $1 million school. This bribe made margins too low, so more likely to provide examples of the firm saved money by skimping on materials - used participating in corruption if they trusted the less than standard number of reinforcement bars and interviewer. less cement in the concrete." There were more participating in corruption examples (20) than not participating in corruption examples (6). First hand participating: "I bribed a judge $4,000 for help in a tax case. The judge ruled in my firm's favor, but a This may reflect the nature of activity in tax inspector was more powerful than the judge, so my Kyrgyzstan, with people choosing to 2 firm had to pay a $70,000 tax fee anyway." participate in corruption more than choosing Second hand not participating: "A customs official to not participate in corruption. attempted to extort a firm on a product shipment. The firm refused to pay and went to higher authorities for help. The firm did not pay extortion, but the shipment was delayed." Most examples of participating plus not participating were for levels of corruption in the middle range of $100 to $100,000, with the second most number of examples being from the high range of greater than $100,000. These levels of corruption may reflect the 3 "A construction company built luxury apartments worth levels that generally occur in Kyrgyz business. $8 million. After completion, it had to bribe government officials $300,000 to get permission to sell them. It paid in cash and in kind (cars and house)." Social desirability bias may have had an effect – the people at the smaller companies and the Interviewees at smaller companies, and interviewees with people with only a bachelor's education may 4 only a bachelor's education, provided more examples of not have felt less established than other participating in corruption than those at larger companies. interviewees and may have thought that I, as a Westerner, would respect them for offering examples of not participating in corruption. There was no meaningful difference by gender, industry, role Since the sample was small with just 10 at company, age of company, age of interviewee, whether an interviewees, it is not surprising that there 5 interviewee had Western education, or whether an interpreter were not meaningful differences in these was used. categories. 91 Georgia findings.
Georgia quantitative results. The figure below provides a graphical illustration of Georgia results for the quantitative study:
Figure 12: Georgia Structural Equation Model
The figure shows that, as for Kyrgyzstan, few of the relationships are significant.
The only significant relationships are between bureaucratic constraints, legal system effectiveness, and informal competition on bribing activity. This may be explained by the small sample sizes of n=140.
Georgia quantitative study versus qualitative study. As for Kyrgyzstan, many findings in Georgia are not consistent between the quantitative study and the interviews.
The table below compares findings from the quantitative study and findings from the interviews:
92 Table 12: Comparison of Georgia Quantitative Results and Interview Findings
Quantitative Finding Quantitative Presence & Interview Revealed Results Regression P- Significant by Interview Similar/ Effect - Georgia Weight Value Yes/No Yes/No Different Effects of bribing activity on firm performance 0.02 0.92 No Yes Different Effects of bureaucratic constraints on bribing activity 0.7 *** Yes No Different Effects of bureaucratic constraints on firm performance 0.08 0.63 No No Similar Effects of economic constraints on bribing activity 0.02 0.57 No Yes Different Effects of economic constraints on firm performance -0.01 0.89 No Yes Different Effects of legal system effectiveness on bribing activity -0.24 *** Yes Yes Similar Effects of legal system effectiveness on firm performance 0.07 0.52 No Yes Different Effects of informal competition on bribing activity 0.22 *** Yes No Different Effects of informal competition on firm performance -0.07 0.48 No No Similar
For the 3 similar relationships, 1 had a significant relationship for the quantitative study and also a presence revealed by the interviews – effects of legal system effectiveness on bribing activity. The other 2 similar relationships had not significant relationships for the quantitative study and no presence revealed by the interviews – the effects of bureaucratic constraints on firm performance and the effects of informal competition on firm performance.
For the 6 different relationships, 4 were because the interviews indicated there was a relationship present, but the quantitative study indicated there was not a significant effect. Interviewees stated that bribing activity had a positive effect on firm performance, but the quantitative study did not show there was a statistically significant effect.
Interviewees stated that economic constraints had a positive effect on bribing activity and a negative effect on firm performance, but the quantitative study did not show there was a statistically significant effect. Interviewees stated that legal system effectiveness had a negative effect on firm performance, but the quantitative study did not show there was a
93 statistically significant effect. Reasons for these differences are discussed below in the
Discussion section.
Two of 6 different relationships occurred because the interviews indicated there was not a relationship, but the quantitative study indicated there was a significant effect.
Interviewees stated that bureaucratic constraints did not have positive effects on bribing activity, but the quantitative study showed there were statistically significant effects.
Interviewees stated that informal competition did not have positive effects on bribing activity, but the quantitative study showed there were statistically significant effects.
Reasons for these differences are also discussed in the Discussion section.
Perspectives on constraints that affect corruption participation in Georgia.
As in Kyrgyzstan, the interviewees provided perspectives on how bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition affected participation in corruption, how such participation affected firm performance, and why people decide to bribe. The table below summarizes these perspectives:
94 Table 13: Summary of Perspectives on Constraints in Georgia
What Interviewees Think What Interviewees Think About Why People Constraint About Constraints Decide to Bribe Bureaucratic constraints are not a driver of corruption. People do not need to bribe to address - Regulations not stifling Bureaucratic bureaucratic constraints: - No need to bribe to mitigate Constraints "There is now a 'one stop shop' to handle all bureaucracy your documents. You can pay more, officially, for expedited service. There is no need to bribe." - Hard to borrow money Economic constraints are a large driver of corruption. Economic - Consumer loans more common People bribe to mitigate the economic constraints: Constraints than commercial "Commercial bank loans are hard to get so - Some borrow from pawn shops people bribe to get them." - Courts very slow and there are Legal system effectiveness is a large driver of large backlogs corruption. People bribe to get faster decisions and to Legal System - Judges are not always qualified avoid prosecution: Effectiveness - Prosecutors are corrupt "I caught my loan officers taking bribes but they - Court system antiquated and bribed the prosecutor to avoid prosecution." needs to be modernized - Informal firms do not exist - Easy to register companies Informal competition is not a driver of corruption. - Informal firms provide no People do not need to bribe to address issues with Informal competition to formal firms informal competition: Competition - Informal firms have no effect on "Easy and cheap to register. Can't compete if not how formal firms operate registered." - Informal firms do not affect bribing activity of firm performance - Could grow much faster if Bribery helps firm performance. People bribe to Bribery -> provided bribes garner revenue and to make their firms grow: Firm - If you bribe more than your "I financed the education of a buyer and he gave Performance competition, you can get more me business." revenue
According to the Georgian interviewees, bureaucratic constraints did not contribute meaningfully to participating in corruption. Regulations were not stifling.
People did not need to bribe to address bureaucratic constraints. As one executive said,
"There is now a ‘one stop shop’ to handle all your documents. You can pay more, officially, for expedited service. There is no need to bribe."
Economic constraints did have an effect on participation in corruption – it was hard to borrow money and consumer loans were more common than commercial loans. 95 People bribed to mitigate their economic constraints by, for example, getting commercial loans instead of more expensive consumer loans. "Commercial bank loans are hard to get so people bribe to get them."
The legal system also had an effect on participating in corruption – courts were very slow and there were large backlogs, judges were not always qualified, and the court system was antiquated and in need of modernization. One executive said, “We filed a case 3 years ago and there is still no decision.” Prosecutors were known to be corrupt. "I caught my loan officers taking bribes but they bribed the prosecutor to avoid prosecution." People decided to bribe to get faster decisions and to circumvent the law.
Interestingly, interviewees consistently indicated that informal competition did not affect either bribing activity or firm performance. Similar to the situation in
Kyrgyzstan, the interviewees indicated that informal competition did not affect either bribing activity or firm performance because it was easy to register new firms, informal firms did not exist, provided no competition to formal firms, and had no effect on how formal firms operated. One interviewee stated, “Easy and cheap to register. Can’t compete if not registered.”
Interviewees stated that if firms were willing to bribe, they could get more business and grow faster. People decided to bribe to garner revenue and make their firms grow faster. One executive said, "I financed the education of a buyer and he gave me business." As in Kyrgyzstan, no other factors, such as infrastructure or political unrest, emerged as factors that affected corruption.
Differences and clusters of examples within Georgia. Appendix M illustrates the examples in Georgia stratified by criteria. They are categorized by whether they were
96 first hand or second hand, and whether they were about participating in corruption or about not participating in corruption. While the Georgia sample of interviewees is small with n=11, several observations can still be made. The small sample size precludes making actual inferences (Hair et al., 2010), but the table below illustrates findings with relevant quotes and observations:
Table 14: Findings and Explanations in Georgia
Finding Explanation Interviewees that had higher levels of trust in the interviews Since participating in corruption is illegal, provided most examples of participating in corruption. it stands to reason that interviewees 1 “To be honest, when I don’t give bribes, then they don’t would be more likely to provide love me. A buyer wants to get new laptop, new car, go on examples of participating in corruption if foreign holiday with family.” they trusted the interviewer. For participating in corruption, there were fewer first hand examples (8) than second hand examples (9). For not participating in corruption, there were more first hand examples Since participating in corruption is illegal, (6) than second hand examples (3). people may be more willing to talk First hand not participating: "They asked me for a 10% about other people participating in kickback and I refused and I did not get the business. They corruption than themselves participating, 2 said, "Why do you not want to make money with us?" I am and may be more eager to give still friends with them but we do not discuss business." examples of themselves not participating Second hand participating: "My friend got sentenced to one in corruption than examples of other year in prison for taking bribes. As a private citizen, he was people not participating. helping people expedite the construction application process." Most examples of participating plus not participating were for levels of corruption in the middle range of $100 to $100,000, These levels of corruption may reflect 3 with the second most number of examples from the low range of the levels that generally occur in less than $100. Georgian business. “The test was money. If you give money you pass the test.” This could be because older firms Interviewees at older companies provided more examples of 4 operated before the Rose Revolution participating in corruption than those at younger companies. and had a history of acting corruptly. This could be because with a high Interviewees with a Masters education (6 of the 11 degree of education, they felt confident 5 interviewees) provided almost all of the examples of participating and did not succumb to social in corruption. desirability bias and were willing to share their stories. There was no meaningful difference by gender, industry, role at Since the sample was small with just 11 company, size of company, age of interviewee, whether an interviewees, it is not surprising that 6 interviewee had a Western education, whether an interpreter there were not meaningful differences in was used, or level of corruption. these categories.
97 For the first finding, that interviewees that had higher levels of trust in the interviews provided most examples of participating in corruption, it stands to reason that people would be more likely to provide examples of participating in corruption if they trusted the interviewer. As in Kyrgyzstan, some executives trusted me a great deal and described first hand examples of participating in corruption. The second finding, that for participating in corruption, there were fewer first hand examples (8) than second hand examples (9), and that for not participating in corruption, there were more first hand examples (6) than second hand examples (3). Since participating in corruption is illegal, people may be more willing to talk about other people participating in corruption than themselves participating, and may be more eager to give examples of themselves not participating in corruption than examples of other people not participating. The third finding, that most examples of participating plus not participating were for levels of corruption in the middle range of $100 to $100,000, with the second most number of examples from the low range of less than $100, may simply reflect the levels of corruption that generally occur in Georgian business. The fourth finding, that interviewees at older companies provided more examples of participating in corruption than those at younger companies, may be because older firms operated before the Rose
Revolution and had a history of acting corruptly. For the fifth finding, that interviewees with a Masters education (6 of the 11 interviewees) provided almost all of the examples of participating in corruption, could be because with a high degree of education, interviewees felt confident, did not succumb to social desirability bias, and were willing to share their stories. For the sixth finding, that there was no meaningful difference by gender, industry, role at company, size of company, age of interviewee, whether an
98 interviewee had Western education, whether an interpreter was used, or level of corruption, could be simply because the sample size of 11 was too small to provide meaningful differences (Hair et al., 2010).
Comparison of Kyrgyzstan and Georgia. Examples of high levels of corruption in
Kyrgyzstan were higher than those in Georgia. As seen in Appendices F and G,
Kyrgyzstan had most of its examples of participating plus not participating in the middle range of $100 to $100,000 for levels of corruption, and the second most examples in the high range of greater than $100,000. Georgia had most of its examples of participating plus not participating in the middle range of $100 to $100,000 for levels of corruption and the second most examples in the low range of less than $100. Kyrgyzstan had few examples with levels of corruption less than $100, and Georgia had few examples with levels of corruption greater than $100,000. Since Kyrgyzstan has higher levels of corruption than Georgia, it is not surprising that the examples provided by the interviewees reflect this difference of levels. Kyrgyzstan had a few more examples of participating in corruption (20), than did Georgia (17). This could be a manifestation of
Kyrgyzstan having more corruption than Georgia though such inferences cannot be made from interview-based data.
Kyrgyzstan had fewer examples of not participating in corruption (6), than did
Georgia (9). While the sample is small and inferences cannot be made, Georgia’s more examples could be explained by the fact that interviewees in Georgia were excited about their country’s transition from being highly corrupt to being less corrupt and they were expressive about not participating in corruption. Similar to how vegans eagerly discuss their healthy diets (Cherry, 2006), the interviewees in Georgia were interested in
99 displaying how they had been in situations where they could have acted corruptly but instead chose to not act corruptly. Appendix N illustrates the number of examples of different findings.
In Georgia, only 2 examples illustrated that it was costly to not act corruptly, while in Kyrgyzstan, there were 4 examples. Because corruption is more prevalent in
Kyrgyzstan and is more a part of the business fabric than in Georgia, not participating in corruption would be more likely to be costly in Kyrgyzstan than in Georgia. In Georgia,
14 examples discussed how there is still corruption in the country’s government, commerce, and institutions. In Kyrgyzstan, 25 examples illustrated how there is corruption in the country’s government, commerce, and institutions. Since Kyrgyzstan is the more corrupt of the two countries, it is not surprising that there were more examples of corruption in government, commerce, and institutions in Kyrgyzstan than in Georgia.
Other differences between Kyrgyzstan and Georgia are examined in the Discussion section below.
Chi-square difference test results. The table below shows a comparison of quantitative results:
100 Table 15: Comparison of Quantitative Results
P Value of χ2 Regression P Significant Difference Similar/ Effect of: Country Weight Value Yes/No Test Different Bribing activity GA 0.02 0.92 No 1.000 Similar on firm performance KYR 0.12 0.16 No Bureaucratic constraints GA 0.70 *** Yes 0.000 Different on bribing activity KYR 0.35 *** Yes Bureaucratic constraints GA 0.08 0.63 No 1.000 Different on firm performance KYR 0.17 0.09 Yes Economic constraints GA -0.01 0.89 No 1.000 Similar on firm performance KYR -0.02 0.84 No Legal system effectiveness GA -0.24 *** Yes 0.000 Different on bribing activity KYR -0.03 0.75 No Legal system effectiveness GA 0.07 0.52 No 1.000 Similar on firm performance KYR 0.04 0.64 No Informal competition GA 0.22 *** Yes 0.000 Different on bribing activity KYR 0.06 0.43 No Informal competition GA -0.07 0.48 No 1.000 Different on firm performance KYR -0.13 0.10 Yes
The p-values of the chi-square difference test indicate differences for 3 of 8 effects: bureaucratic constraints on bribing activity, legal system effectiveness on bribing activity, and informal competition on bribing activity. The p-values of the chi square test indicate there are not differences for 3 effects: bribing activity on firm performance, economic constraints on firm performance, and legal system effectiveness on firm performance. For 2 effects, the p-values of the chi square difference test did not show significance. The group difference test indicated that one country had significant effects but the other country did not. The effect of bureaucratic constraints on firm performance is not significant in Georgia but is significant in Kyrgyzstan. Also, the effect of informal competition is not significant in Georgia but is significant in Kyrgyzstan.
101 Discussion
Findings from this study complement findings from my previous quantitative study and findings from studies reviewed in the Literature Review. Following are comparisons of the findings and how they triangulate to the three theories (institutional theory, ethical theory, and social norm theory) discussed in the Literature Review.
Qualitative findings versus quantitative findings. As illustrated in Tables 9 and
12 in the Findings above, which compare quantitative results with interview findings, in
Kyrgyzstan 3 of 9 effects were similar and 6 of 9 effects were different, and in Georgia 3 of 9 effects were similar and 6 of 9 effects were different. In the situations where the interview results were similar to the quantitative results, the interview results provided additional reliability and interpretive validity for the quantitative findings. For example, the quantitative study found that in Kyrgyzstan, bureaucratic constraints have a significant and positive effect on bribing activity. The interview findings aligned with this result. One interviewee described how her firm bribed government officials as the expedient way to get work permission for foreign employees. Institutional theory explains why business people act corruptly by suggesting that economic choices made by firm managers are enabled and constrained by complex institutions (North, 1990; North,
1994). It makes economic sense that an executive would bribe a government official to reduce complexity and bureaucratic constraints.
In Georgia, the quantitative study found that informal competition did not have a significant effect on firm performance. The interview findings also aligned with this result. Interviewees described how informal competition was not a factor in Georgia,
102 because it was easy to register companies and only formal companies competed with them. One executive said, “Informal competition is not an issue. All firms are registered.”
Regarding the situations where the interview results were different than the quantitative results, 9 of the 12 situations across both countries were because the interviews indicated there was a presence, but the quantitative study indicated there was not a significant effect. For example, in Kyrgyzstan and Georgia the quantitative study indicated that economic constraints did not have a significant and positive effect on bribing activity. However, interview findings were the opposite – interviewees stated that economic constraints meaningfully contributed to the level of bribing activity. Kyrgyz interviewees described situations where banks did not have enough capital for low interest rate loans, and business owners had to bribe bank officials in order to get loans.
Per institutional theory, it made economic sense for business owners to bribe officials in order to attain loans. For both Kyrgyzstan and Georgia, the quantitative study indicated that bribing activity did not have significant and positive effect on firm performance.
Interview findings were the opposite – interviewees stated that bribing activity meaningfully contributed to firm performance. One Georgian interviewee said, “My company is growing at 5% to 10% per year. But if I gave green light to bribe, we could easily grow at 20% to 30%”. Per institutional theory, it would make sense to provide bribes, but in this case, per ethical theory, it did not make sense. Ethical theory explains why business people act corruptly by rationalizing their corrupt behavior in different ways (Ayal & Gino, 2011; Tyson, 1990). Social norm theory, which explains why business people act corruptly by reflecting on what is normally accepted (Finney &
Lesieur, 1982), illuminates why the executive did not pursue bribing activity. In post
103 Rose Revolution Georgia interviewees said that there is now a social standard and expectation to not bribe. The executives followed injunctive norms (general societal expectations of behavior).
For the 9 situations in which interviews indicated strong relationships but quantitative results indicated there were not significant relationships, the cause of the difference is the small sizes of the quantitative samples (Kyrgyzstan n=143 with beta
=0.14 and Georgia n=140 with beta =0.81). Not surprisingly, in a large quantitative study with the same variables but where all 12 remaining former Soviet republics were added to the data set with a total n=2956, statistically significant relationships were detected for all
9 of the situations (Greppin et al., 2019).
In 3 of the 12 situations across both countries where interview results were different from the quantitative results, the interviews indicated there was no significant effect, but the quantitative study indicated there was a significant effect. These three situations were: 1) in Georgia, interviewees stated that bureaucratic constraints did not have positive effects on bribing activity, but the quantitative study showed there were statistically significant effects, 2) in Georgia, interviewees stated that informal competition did not have positive effects on bribing activity, but the quantitative study showed there were statistically significant effects, and 3) in Kyrgyzstan, interviewees stated that informal competition did not have positive effects on firm performance, but the quantitative study showed there were statistically significant effects.
These differences can be partially explained by the small sample of interviewees and possible sampling bias. In addition, the quantitative study used data from 2013, when circumstances were different than when I interviewed people in 2019. Bureaucratic
104 constraints could have been stronger in Georgia in 2013 than in 2019, and informal competition could have been stronger in both countries in 2013. In addition, the people I interviewed were owners and CEOs, and for the World Bank quantitative study, lower level managers as well as CEOs were interviewed. Finally, I asked my interviewees different questions than those used by the World Bank. For example, the World Bank study asked:
To what degree are practices of competitors in the informal sector an obstacle to the current operations of this establishment? Scale: 0=No obstacle, 1=Minor obstacle, 2=Moderate obstacle, 3=Major obstacle, 4=Very severe obstacle.
I asked:
Can you think of examples of how competition from unregistered firms has affected the ability of traditional firms to do business? Can you think of examples of firms making gifts or informal payments in order to respond to competition from unregistered firms?
Qualitative findings versus literature review. Tables 10 and 13 in the Findings section illustrate perspectives from the interviewees on how bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition affected participation in corruption, and how such participation affected firm performance. The tables illustrate alternative accounts on what interviewees gave about why executives bribe. Next, I discuss how these accounts align with previous explanations reviewed in the literature review.
More bureaucratic constraints are likely to increase participation in corruption
(Asher & Rajan, 2001; Djankov et al., 2002; Gaviria, 2002; Safavian et al., 2001) and lower firm performance (Beck et al., 2005; Buckberg, 1997; Hallward‐Driemeier et al.,
2006; Kaufmann et al., 2000). This aligns with what interviewees stated. In Kyrgyzstan,
105 where bureaucracy is stifling, interviewees discussed paying bribes to cut through red tape. As one executive stated, “Bribes are to get things done.” Another executive discussed how to avoid waiting two weeks to register a car, he paid a bribe to get it registered in two hours. Descriptive social norms (standards that develop from observation of others’ behavior) justified his corrupt activity. Before the Rose
Revolution, when bureaucracy was stifling, interviewees in Georgia often paid bribes to get things done, which, per institutional theory, makes sense. For example, one executive discussed paying his very first bribe to a police inspector in order to get a driver’s license.
Descriptive norms played a role in his decision to bribe. As a child, he had watched his father place money in the hands of a policemen to avoid traffic tickets, and had a feeling that paying bribes was appropriate. Now, due to changes introduced after the 2003 Rose
Revolution, Georgians do not have to pay bribes to get simple things done. Lower bureaucracy has resulted in lower bribing levels.
People act corruptly because economic choices are ultimately enabled and constrained by complex configurations of institutions (North, 1990; North, 1994). Also, perceptions of bribing as legitimate and acceptable behavior change over time
(Schnackenberg, 2014). Interviews with the executives in Georgia vividly illustrate these effects. Before the Rose Revolution, executives felt it was socially appropriate, ethically permissible, and economically sensible to bribe. After the Rose Revolution, it was no longer socially and ethically acceptable to bribe, nor was it economically needed.
More economic constraints are likely to increase participation in corruption
(Besley & McLaren, 1993; Martin et al., 2007; Okpara & Wynn, 2007) and reduce firm performance (Beck et al., 2005; Binks & Ennew, 1996; Carpenter & Petersen, 2002;
106 Musso & Schiavo, 2008; Okafor, 2017; Oliveira & Fortunato, 2006). This also aligns with what interviewees stated. Because of shortages of bank funds, executives in both
Georgia and Kyrgyzstan resorted to either paying higher interest rates for consumer loans, or borrowing from friends and family at high interest rates. One Kyrgyz executive described how his firm obtained a $5 million loan from a bank not because of credit worthiness, but because of a close personal relationship that his firm’s CEO built with a bank loan officer through providing gifts. This activity reflects institutional theory – it made sense for the executive to pursue getting the loan for economic reasons. It also reflects social norm theory – subjective norms (expectation of close others), in this case his colleagues and family, enabled the executive to act corruptly. And it reflects ethical theory – situationalism, in which surrounding circumstances play a larger role on making decisions than do an individual’s character (Kamtekar, 2004), contributed to his activity.
In less corrupt environments he may have been less prone to act corruptly.
Where there is better legal system effectiveness, participation in corruption is less likely (Ajie & Wokekoro, 2012; Ali & Isse, 2002; Fagbemi et al., 2010; Zhou & Peng,
2012) and firms suffer less in performance (Beck et al., 2005; Carlin et al., 2007;
Demirgüç-Kunt & Maksimovic, 1998). Echoing this point from these studies, my interviewees stated that because of the poor legal system, they had to pay bribes to get this done. One Kyrgyz executive said, “I pay to get better decisions. To speed up.” A
Georgian interviewee described how corrupt loan officers who were caught taking bribes would bribe prosecutors to avoid prosecution. This activity reflects social norm theory – injunctive norms enabled the loan officers to commit the bribes. And it reflects ethical theory – conformity bias, in which people take cues for unethical behavior from the
107 actions of others rather than from using their own judgement (Moscovici & Faucheux,
1972), may have let the loan officers justify their behavior to themselves.
Firms that face more informal competition are more likely to participate in corruption (Helmke & Levitsky, 2004; Lambsdorff, 2002; Ledeneva, 1998; Tonoyan et al., 2010) and suffer in performance if not doing so (Ali & Najman, 2014; González &
Lamanna, 2007; Schneider & Enste, 1999). On this topic my interviews were inconclusive. In both Georgia and Kyrgyzstan, interviewees consistently stated that there was no informal competition. It both countries, it was easy for a company to register, and all competing firms were formal.
Generally, bribing activity has been found to significantly affect firm performance, both negatively in line with “sand the wheels” hypothesis (Meon & Weill,
2009; Seker & Yang, 2012), and positively in line with “grease the wheels” hypothesis
(Hellman et al., 2003; Williams et al., 2016). My earlier quantitative paper aligned with the “grease the wheels” hypothesis (Greppin et al., 2019). Also, in both Kyrgyzstan and
Georgia, executives stated that firms could have more revenue and grow faster by bribing. In Kyrgyzstan, an executive described how he paid for graduate school for a government buyer and was awarded business from the buyer. This act reflects institutional theory – it made economic sense for the executive to bribe the buyer. His company benefitted from the bribe. Interestingly, the executive did not feel that paying for graduate school was bribing, but it does fit the definition, “the quid pro quo exchange between local firms and government officials in which cash, favors and gifts are provided by the former to obtain illicit advantage in the allocation of state resources and services from the latter.” (Sanyal, 2005). The example illustrates that per injunctive norms,
108 bribing can become acceptable behavior in some settings and that firm managers are likely to comply with institutional pressures to bribe. Per institutional theory, institutions can enable firm performance by creating incentives and opportunities that can be exploited. Per ethical theory, firms bribe to enhance their performance by succumbing to situationalism (Kamtekar, 2004) and to conformity bias (taking cues for unethical behavior from actions of others rather than relying on judgement) (Moscovici &
Faucheux, 1972).
Kyrgyzstan versus Georgia. Little has changed with corruption in Kyrgyzstan since it became an independent country in 1991 (Cokgezen, 2004). In 2018 it was more corrupt than 73% of 180 ranked countries (Transparency International, 2018). Georgia was similarly corrupt at independence in 1991. However, after its Rose Revolution in
2003, Georgia improved to being in 2018 more corrupt that just 23% of 180 ranked countries (Transparency International, 2018).
Differences between Kyrgyzstan and Georgia are reflected in the interviews.
According to an executive in Kyrgyzstan, where there remains inefficient bureaucracy and bureaucratic constraints are still oppressive, “Bribes are to get things done.” And in
Georgia, where the bureaucracy is now efficient and bureaucratic constraints are no longer oppressive, an executive stated the opposite: “There is no need to bribe.”
Appendix N illustrates other differences in examples of corruption between the two countries. In Georgia, in the 9 examples when people decided to not act corruptly, it was always for ethical reasons. For example, one executive was asked to provide a bribe of 10% of project value to buyers in order to sell a large project. He declined to provide the bribe for ethical reasons, and did not get the business. In Kyrgyzstan, interviewees
109 were more pragmatic. In the 6 examples of not acting corruptly, half of the reasons for not acting corruptly were for business practicalities. For instance, a firm refused to pay a
Kyrgyz customs official a bribe in order to have a container shipment imported into
Kyrgyzstan. Instead, the firm appealed to higher authorities and managed to import the shipment without paying a bribe. The shipment was delayed, but the firm did not want to set the precedent of paying a bribe because they would be expected to pay bribes on future shipments as well.
Another difference between Kyrgyzstan and Georgia were the interviewees’ views about corruption. In Kyrgyzstan, interviewees appeared fatalistic about the status of corruption in their country. They consistently indicated that corruption was a problem and that it would not go away. One executive said, “Corruption will not decrease. Won’t happen. Is nature of people, rich and poor. Does not matter.” Another interviewee said,
“Bribes are to get things done. Part of Soviet culture, the fabric of society. They are appropriate and needed. It is rude if you do not give.” There is social acceptance for corruption. The mother of one executive said to him, regarding a family friend, “He works in Customs. He built a house. He bought a car. Why don’t you?” Corruption is ingrained as a society norm, and people do not feel a need to act differently.
In Georgia, the Rose Revolution provided an institutional shock that changed social norms (Cornell & Nilsson, 2009; Lanskoy & Areshidze, 2008), and social norms were now different from those in Kyrgyzstan. Corruption was not considered to be a problem, and it was not considered to be an acceptable activity. Interviewees were optimistic that the status of corruption had greatly improved. People mentioned with pride that along with the reduction in corruption, there were many indicators of social
110 progress. They stated that drinking and driving was no longer an issue, that everyone wore seatbelts, that cars now waited for pedestrians when they crossed the street, and that petty theft was less common. According to one executive, “Before Rose Revolution, I had to hide my gold wedding ring while driving or police would try to take it. After Rose
Revolution, I could leave it in my unlocked car.”
Though the Georgian’s statements aligned with reality, they were overly optimistic. They stated that they did not participate in corruption, yet examples of participating in corruption still came out. The Georgian’s points about drinking and driving, seat belts, and pedestrian crossings were also overly optimistic. Drinking and driving is still endemic (Georgia Drunk Detox, 2019) , petty theft is still a problem
(Overseas Security Advisory Council, 2019). In my week in Georgia in May 2019, I saw the majority of drivers not wearing seatbelts, and crossing the street on foot was hazardous. Their statements can be explained by a societal interest in being optimistic
(Scheier & Carver, 1993).
Even though the Georgians enthused that corruption was no longer an issue and that they personally did not participate in corruption, they still provided examples of firsthand experiences of corruption. One executive, who had vociferously stated he did not participate in corruption, said, “I did not bribe. I financed education for the buyer.
The buyer improved himself and he is now CIO.” Another executive, after stating that he did not participate in corruption, said, “The government required three tenders, so I created two companies to bid against me.”
111 Summary of quantitative+Qualitative Study
This study offers insights to scholars, to policy makers, and to practitioners on pragmatic methods for reducing corruption and enhancing firm performance in countries with high levels of corruption. Using embedded mixed methods (Creswell & Plano Clark,
2007; Teddlie & Tashakkori, 2009), the study provides interpretive validity and more reliability for studies on corruption cited in this paper. It addresses the research questions:
1) What motivates local executives in Kyrgyzstan and Georgia to decide whether to participate in corruption, 2) to what extent do present bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition as perceived by the local executives influence their reasoning that shapes their participation in corrupt behaviors, and 3) how does such participation affect their firm’s performance?
The study confirms that external factors such as bureaucratic constraints, economic constraints, and legal system effectiveness affect bribing activity. “Bribes are to get things done.” “Commercial bank loans are hard to get so people bribe to get them.”
“I pay to get better decisions. To speed up.” Thus, a key to reducing bribing activity is to reduce the reasons to bribe – to reduce stifling and inefficient bureaucracy, to improve access to affordable capital, and to make legal systems more quick, enforceable, and fair.
The paper illustrated that Georgia reduced bureaucratic constraints through the institutional shock of the Rose Revolution (Cornell & Nilsson, 2009; Lanskoy &
Areshidze, 2008). Though it took a revolution to accomplish the change, it shows that constraints can in fact be addressed.
The study also supports the “grease the wheels” hypothesis (Hellman et al., 2003;
Williams et al., 2016) by showing that there is significant positive impact between
112 bribing activity and firm performance. Firms undergo risk, effort, and expense to bribe, and do so only if it makes rational economic sense. This paper makes the distinctive point that policy makers need to recognize that though corruption is bad for countries, it can be good for individual firms. As such, policy makers and practitioners need to focus on individuals. They can reduce bribing activity by changing the cost benefit ratio through making costs of bribing higher and benefits of bribing lower. Costs can be raised by increasing the likelihood that infractions are caught by governments and firms, and by increasing the penalties, such as jail time or job termination, for the infractions. Benefits can be lowered by reducing trust in government officials through implementing staff rotations in bureaucracies.
113 CHAPTER 6: DISCUSSION AND CONCLUSIONS
Integrated Findings
The problem of practice, “Bribing: why do people do it and is it worth it?”, was analyzed from three separate but interrelated standpoints. I utilized mixed methods in the form of sequential, explanatory mixed method design: Qualitative → Quantitative → quantitative+Qualitative, with two integration points (Creswell & Plano Clark, 2007;
Teddlie & Tashakkori, 2009). I focused specifically on bribery, “the quid pro quo exchange between local firms and government officials in which cash, favors and gifts are provided by the former to obtain illicit advantage in the allocation of state resources and services from the latter” (Sanyal, 2005).
The study generally addressed three research questions: 1) “What motivates U.S. executive expatriates who work in environments of pervasive corruption to decide whether to participate or not participate in corruption?”; 2) “In the former Soviet republics, to what extent do bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition affect bribing activity and to what extent does bribing activity affect firm performance?” and 3) “What motivates local executives in
Kyrgyzstan and Georgia to decide whether to participate in corruption, to what extent do present bureaucratic constraints, economic constraints, legal system effectiveness, and informal competition as perceived by the local executives influence their reasoning that shapes their participation in corrupt behaviors, and how does such participation affect their firm’s performance?”
Below, I discuss findings from each of the three studies. Table 16 highlights seven key findings across the three phases:
114 Table 16: Seven Key Findings
Finding Phase UOM Integration Executives make decisions about participating in corruption in three ways: Individual level study of why 1 1) Consistently abstain from corrupt practices 1 Individual and how corruption occurs 2) Reluctantly succumb to extortion 3) Willingly pursue corruption - There are significant costs and benefits to choosing each of these paths Individual level study of why 2 1 Individual - Choices are difficult and social norms play a and how corruption occurs significant role Bureaucratic constraints, economic constraints, Firm level study of why and and informal competition have significant direct how corruption occurs 3 positive impacts on bribing activity and on firm 2 Firm supplements individual level performance, while legal system effectiveness has study a significant direct negative impact Firm level study of why and - Bribing activity has a positive effect on firm how corruption occurs 4 performance 2 Firm supplements individual level - Supports the “grease the wheels” theory study Triangulates, provides Interview findings align with Phase 2 quantitative complementarity perspectives, findings on how external factors (except Informal 5 3 Individual and explains potential Competition) affect bribing activity and how contradictions for why and how bribing activity affects firm performance firms participate in corruption
Triangulates, provides Interview findings align with the Literature on complementarity perspectives, how external factors (except Informal 6 3 Individual and explains potential Competition) affect bribing activity and how contradictions for why and how bribing activity affects firm performance firms participate in corruption
Kyrgyzstan and Georgia have evolved differently: - Kyrgyzstan corruption levels high since 1991 independence Country level study of why and 7 3 Country - Georgia corruption levels, while high after 1991 how corruption occurs independence, have become much lower after institutional shock of 2003 Rose Revolution
115 Key findings from “How U.S. executive expatriates work in environments of pervasive corruption.” The first key finding, based on semi-structured interviews with 30
U.S. executive expatriates working and living in corrupt countries, is that executives make decisions about participating in corruption in three ways: 1) consistently abstain from corrupt practices, 2) reluctantly succumb to extortion, and 3) willingly pursue corruption. Zero tolerance respondents avoided participating in corruption and kept subordinates from participating as well. In succumb to extortion, respondents reactively succumbed to extortion under threat of financial harm. In pursue corruption, respondents proactively pursued corruption as an efficient way to build their companies and to capture personal gain. The second key finding is that there are significant costs and benefits to choosing each of these paths. Choices are difficult, and social norms played a significant role (please see Table 4 above).
The executives considered costs and benefits and used rational choice when they made their decisions. With rational choice, people seek to gain the greatest benefits from their actions, taking into account a number of variables (Prabowo, 2014: 310). People have a predisposition to put their personal interests before others’ when making decisions
(Caplan, 2006). Deciding to not participate in corruption, to reactively succumb to extortion, or to proactively pursue corruption can make rational sense given the circumstances in which the decisions were made.
When executives decided not to participate in corruption, to reactively succumb to extortion, or to proactively pursue corruption, the motivations (benefits) outweighed the costs. Interestingly, the U.S. executives endured emotional pain regardless of which of the three different paths they chose.
116 Key findings from “Does bribery affect firm performance? the effect of exogenous factors in former Soviet Republics.” The third key finding is that bureaucratic constraints, economic constraints, and informal competition have significant direct positive impacts on bribing activity, while legal system effectiveness has a significant direct negative impact. Bureaucratic constraints, economic constraints and informal competition have significant direct negative impacts on firm performance, while legal system effectiveness has a significant direct positive impact. The fourth key finding is that bribing activity has a positive effect on firm performance.
The findings support extant theory. Regarding the effect of external constraints on bribing activity, studies show that firms that face higher bureaucratic interference are more likely to pay bribes (Asher & Rajan, 2001; Djankov et al., 2002; Gaviria, 2002;
Safavian et al., 2001), that firms with limited access to financial resources are more likely to engage in corruption (Besley & McLaren, 1993; Martin et al., 2007; Okpara & Wynn,
2007), that bribery is more likely to occur when firms compete with informal firms
(Helmke & Levitsky, 2004; Lambsdorff, 2002; Tonoyan et al., 2010), and that strong legal systems decrease the amount of bribery that firms conduct (Zhou & Peng, 2012).
Regarding the effect of external constraints on firm performance, studies show that bureaucratic constraints constrain firm growth (Beck et al., 2005; Hallward‐
Driemeier et al., 2006; Kaufmann et al., 2000), that difficulty obtaining financing lowers firm performance (Beck et al., 2005; Binks & Ennew, 1996; Carpenter & Petersen, 2002;
Musso & Schiavo, 2008; Okafor, 2017; Oliveira & Fortunato, 2006), that firm performance is dampened by informal competition (Ali & Najman, 2014; Schneider &
117 Enste, 1999), and that firms in countries with high ratings for legal norm compliance are able to grow faster (Demirgüç-Kunt & Maksimovic, 1998).
Regarding the effect of bribing activity on firm performance, studies illustrate that there is a positive effect of bribing on firm performance (Hellman et al., 2003; Sahakyan
& Stiegert, 2012; Williams & Martinez-Perez, 2016). This supports the “grease the wheels” hypothesis (Meon & Weill, 2009).
Key findings from “What motivates participating in corruption and how does such participation affect firm performance?” The fifth key finding is that interview findings align with the Quantitative study findings on how bureaucratic constraints, economic constraints, and legal system effectiveness affect bribing activity and firm performance, and how bribing activity affects firm performance. The sixth key finding is that interview findings support extant theory on how bureaucratic constraints, economic constraints, and legal system effectiveness affect bribing activity and firm performance, and how bribing activity affects firm performance.
The seventh key finding is that Kyrgyzstan and Georgia, both former Soviet republics, have evolved differently. Corruption levels in Kyrgyzstan have remained consistently high since the country became independent in 1991 (Cokgezen, 2004;
Transparency International, 2018). Corruption levels in Georgia, while high after independence in 1991, have become significantly lower after the institutional shock of the Rose Revolution in 2003 (Cornell & Nilsson, 2009; Transparency International,
2018). The different levels of corruption manifest themselves in a number of ways. First, bureaucratic constraints are still an issue in Kyrgyzstan, but not in Georgia. Second,
Kyrgyz are fatalistic about corruption remaining in their country, whereas Georgians are
118 optimistic about improvements. Finally, if Kyrgyz do not participate in corruption, they have pragmatic reasons for doing so, whereas if Georgians do not participate in corruption, they do it for ethical reasons.
Integrated findings across the three studies. In the Qualitative study, I looked at how US executive expatriates work in environments of pervasive corruption. Using individuals as the unit of analysis, I interviewed 30 executives working in corrupt countries. Then, to understand the motivation of firms, in the Quantitative study I used
World Bank Enterprise Survey data to understand how external factors affect bribing activity and how bribing activity affects firm performance. Finally, in the quantitative+Qualitative study, I garnered an understanding of country level perspectives.
The study’s findings encompass why and how corruption occurs at three levels – the individual, the firm, and the country. For each level, people used rational choice to decide on whether to participate in corruption. At each level, situation affected costs and benefits and shaped decisions. Per the figure below, the levels are nested: Figure 13: Individual, Firm, and Country Findings
119 Individual level. Individual executives used rational choice when they decided on whether to participate in corruption. Seeking to gain the greatest benefits for their actions, they took different variables into account (Prabowo, 2014). Situation played a critical role in their decision, with surrounding circumstances playing a larger role than the individual’s character (Kamtekar, 2004). Ultimately, their decisions came to a cost / benefit analysis, and they chose options that offered them the highest perceived net benefits (Hayward, 2007). Social norm theory, which explains why business people act corruptly by reflecting on what is normally accepted (Finney & Lesieur, 1982), illuminates why executives did not pursue bribing activity in some circumstances. When executives decided to not participate in corruption, the costs of enduring emotional pain were outweighed by the strong convictions of personal norms, and the costs of losing business and facing retaliation were both outweighed by injunctive norms, with rules barring such behavior. When executives decided to reactively succumb to extortion, the benefits also outweighed the costs. The costs of enduring emotional pain and the costs of not knowing where money was going were outweighed by the descriptive norms of no alternative behavior. The costs of getting on a slippery slope were outweighed by the subjective norms of cultural expectations. When executives decided to proactively pursue corruption, the benefits again outweighed the costs. The costs of enduring emotional pain were outweighed by the descriptive norms of how to get things done. The costs of not being able to trust people and the costs of facing risks to personal safety were outweighed by the personal norm of ends justifying means.
Firm level. Firms also used rational choice when they decided on whether to participate in corruption. Institutional theory explains why firms act corruptly by
120 suggesting that economic choices made by firm managers are enabled and constrained by complex institutions (North, 1990; North, 1994). External constraints affect the situations in which firms operate, and when firms used cost / benefit analysis to decide on actions that brought highest perceived net benefits (Hayward, 2007), the situation played a key role in the decision (Kamtekar, 2004). Firms that face higher bureaucratic interference are more likely to pay bribes (Asher & Rajan, 2001; Djankov et al., 2002; Gaviria, 2002;
Safavian et al., 2001), firms with limited access to financial resources are more likely to engage in corruption (Besley & McLaren, 1993; Martin et al., 2007; Okpara & Wynn,
2007), bribery is more likely to occur when firms compete with informal firms (Helmke
& Levitsky, 2004; Lambsdorff, 2002; Tonoyan et al., 2010), and strong legal systems decrease the amount of bribery that firms conduct (Zhou & Peng, 2012).
Country level. In countries, cost / benefit analysis for participating in corruption is affected by situation. In Kyrgyzstan, which has high levels of corruption, it more frequently makes rational sense to participate in corruption than in Georgia, which has lower levels of corruption (Prabowo, 2014; Transparency International, 2018).
Institutional theory explains why business people act corruptly by suggesting that economic choices made by firm managers are enabled and constrained by complex institutions (North, 1990; North, 1994). Since individuals and firms choose actions that bring highest perceived net benefits (Hayward, 2007), the situation plays a key role in the decision (Kamtekar, 2004). In a country with more external constraints encouraging corruption, individuals and firms will be more likely to participate in corruption. For example, a Kyrgyz executive said, “Bribes are to get things done.”, whereas a Georgian executive said, “There is no need to bribe.” This illustrates situationalism, in which
121 surrounding circumstances play a larger role on making decisions than do an individual’s character (Kamtekar, 2004). Social norm theory explains why business people act corruptly by reflecting on what is normally accepted (Finney & Lesieur, 1982). In
Kyrgyzstan, there is social acceptance of corruption and people do not feel a need to avoid corruption (Cokgezen, 2004). In Georgia, the opposite is the case – there is not acceptance of corruption and people feel a need to avoid it (Cornell & Nilsson, 2009;
Lanskoy & Areshidze, 2008).
Corruption is a multi-dimensional, multi-level, and context specific phenomenon embodied in individual, firm, and country levels. At all three levels, actors behaved rationally and made decisions that provided the highest perceived net benefits (Hayward,
2007). Situations affected the calculus of their decisions. Social norm theory, ethical theory, and institutional theory help explain how decisions were made regarding participating in corruption.
Implications and Contributions
This study has important implications and contributions for policy makers, for corruption researchers, and for practitioners. The Qualitative strand, focusing on the individual, shows that when U.S. executive expatriates live and work in environments of pervasive corruption, social norms affect how they choose to participate in corruption.
Some executives choose zero tolerance for corruption, some choose to reactively succumb to extortion, and some choose to proactively participate in corruption. The study illustrates costs and benefits incurred from following each approach as well as the different social norms expatriates use when deciding how to respond to corruption. This study highlights how specific costs from choosing different courses of action map to
122 specific social norms for why executives choose the behaviors. This helps us understand what motivates U.S. executives to make decisions about participating in corruption when living and working in countries with pervasive corruption.
Companies face legal, financial, and reputational risk when their executives commit corrupt acts. It requires more than corporate training and policy to stifle corruption. (Hansen, 2011). It also requires understanding the motivations of executives who commit corrupt acts (Prabowo, 2014). This offers new insights into the literature on social norm compliance and risk in the international context.
The Quantitative strand, focusing on the firm, reveals that because bureaucratic constraints increase bribing activity, more bureaucracy may not reduce bribing activity.
Rather, policies that aim to reduce corruption by broadening government oversight may be counterproductive. Interestingly, the additional bureaucratic constraints from more oversight may actually increase levels of corruption. This provides an important insight into how transition economies should be managed – what is needed, rather than simply more bureaucracy, are solid institutions that effectively regulate and control behavior.
Economic constraints increase bribing activity and reduce firm performance. Both of these effects are undesirable. However, as countries’ economies improve, they can reduce constraints on credit. There will be less cause for firms to pursue bribing and firm growth will not be less stifled. There are of course many advantages for country economic growth, but reducing likelihood of bribing activity and increasing firm performance are important advantages. Policy makers can improve economies by building effective market supporting institutions that make it easier and cheaper for firms to deal with governments (Zhou & Peng, 2012). In the former Soviet states, there is a
123 need to improve access to capital and to make the process of applying for capital more transparent (Tonoyan et al., 2010).
Since legal system effectiveness reduces bribing activity and enhances firm performance, there is all the more cause for countries to endeavor to make their court systems quick, enforceable, and fair. As with economic growth, there are many reasons that better legal system effectiveness is good for countries, and reducing the likelihood of bribing activity and increasing firm performance are very important reasons. In the former Soviet states, there is a need to improve legal system implementation and enforcement and to protect contract and property rights (Tonoyan et al., 2010).
And since informal competition increases bribing activity and reduces firm performance, it is important for countries to reduce the number of informal, or unregistered firms. Bribing activity can be lowered by reducing the asymmetry between informal and formal firms (Williams et al., 2016). To formalize informal firms and reduce the intensity of the informal sector, governments must work to create a secured business environment and enable informal firms to have better access to finance, infrastructure, and property rights (Ali & Najman, 2014).
Finally, even though bribing activity has negative effects on economies of nations, bribing activity enhances firm performance in studied settings. If the expected gains of bribing are great compared to the expected penalty and probability of being caught, then it is a rational choice for firms to pursue bribing (Becker, 1968). Changing the cost benefit ratio by making the costs of bribing higher would make bribing less attractive. Recognizing that it is individuals who decide to participate in corruption, it would behoove policy makers to increase the likelihood that infractions are caught, and to
124 increase the legal penalties, such as fines and prison time, for the infractions. At the firm level, it would be helpful to have firm audits increase the likelihood that infractions are caught and to increase corporate penalties, such as termination, for the infractions.
The expected gains of bribing could be lowered, if bribe payers did not trust government officials to execute promised deals. Policy makers could reduce trust in government officials by implementing staff rotations in bureaucracies (Tonoyan et al.,
2010). Newly appointed bureaucrats would be less likely to honor illicit agreements than their predecessors who had already received illegal payments. Reducing the gains of bribery while increasing the costs could make participating in bribery an irrational choice.
In addition, policy makers should work to align the values of executives with the laws and regulations for bribery (Williams et al., 2016). With a “responsive regulation” approach, harmful bribing activity can be reduced by a combination of engaging firms to self-regulate and not engage in bribery, by providing incentives to firms to not bribe, and finally, by using punitive means to stop bribing (Braithwaite, 2009). Since not everyone would respond to appeals to morality, compliance to the law needs to be secured by punitive legal sanctions (Ufere, 2011). With a “slippery slope framework” (Kirchler,
Hoelzl, & Wahl, 2008), both voluntary and enforced tools can be used to develop greater trust in authorities by making formal institutions more effective and providing more power to authorities to detect and punish bribery (Kogler, Muehlbacher, & Kirchler,
2015).
The quantitative+Qualitative strand, in its focus on the nation, shows that country level corruption can meaningfully change over time. Corruption levels in Kyrgyzstan
125 have been consistently high since the country became independent in 1991, whereas corruption levels in Georgia, while high after independence in 1991, have become much lower after the institutional shock of the Rose Revolution in 2003. Georgia’s bureaucracy became much more efficient, (Cornell & Nilsson, 2009; Lanskoy & Areshidze, 2008) and there was less of a need to bribe. A successful policy for countries to fight corruption may be to improve government efficiency (Meon & Weill, 2009).
Overall, corruption is a multi-dimensional, multi-level, and context specific phenomenon embodied in individual, firm, and country levels of socio-economic, legal, and political contexts. As such, anti-corruption strategies and policy designs must account for its multi-dimensionality, complexity, and context-specificity. To effectively reduce corruption, it is critical to understand the motivations of individuals and firms, to address constraints affecting corruption, and to change the cost benefit ratio by making costs higher and benefits lower.
Limitations
For the first Qualitative strand, a limitation is that although many of the 30 interviewed executives were very open and admitted to succumbing to extortion or pursuing corruption, some executives stated implausibly that they were not directly aware of corruption in their environments. For example, one executive who worked many years in Russia said that his boss or his local partner may have participated in corruption, but that he himself never had direct contact with corruption. Given the high level of corruption in Russia (World Bank Group, 2013), it seems unlikely that this executive was being forthright. So, it is possible that the study understates the likelihood of succumbing to extortion or pursuing corruption, due to the social desirability effect (Grimm, 2010).
126 A second limitation is that I lived and worked in corrupt countries such as
Kyrgyzstan, Uzbekistan, Armenia, Russia, Pakistan, and India. I encountered corruption and may have inadvertently imposed my personal perspectives on the data interpretation.
It is difficult to escape subjectivity when interpreting data (Vandenbroucke, 1998).
A third limitation is that although the thirty interviewed executives represented a large range of countries, they were not from a random sample. Rather, they were all from my social network and their recommendations, which may have increased the prevalence of owners and small private companies.
For the Quantitative strand, a limitation is that the study covered only the former
Soviet republics. Since the Soviet republics have new governments and are evolving from planned economies to market economies (Brown, 2014), they may perform differently than countries in other regions of the world. Given the relatively narrow scope of this study, findings may not be as generalizable as findings from studies with broader regional scopes.
A second limitation with this strand is though the exploratory factor analysis showed good model fit, there were several issues with confirmatory factor analysis.
Composite reliability and convergent validity were not confirmed for two factors,
Bureaucratic Constraints and Firm Performance. In the structural equation model, the
R^2 for Firm Performance was only .06, showing a high amount of unexplained variance.
Prediction values are less precise than if the R^2 was higher (Field, 2009).
A third limitation is that though this study explored the causality between Bribing
Activity and Firm Performance, it did not exclude the endogenous effect of the reverse causality between Firm and Performance and Bribing Activity. It is possible that as firms
127 attain higher performance, they in turn bribe at higher levels (Martin et al., 2007). This could be addressed in future studies by additional statistical techniques such as using difference in difference approach or introducing instrumental variables to separate such endogenous effects.
A fourth limitation is that the Quantitative strand did not account for the potential costs of bribing. As noted in the literature review and in the Qualitative strand, there are significant costs to individuals, firms, and countries from bribing. Costs to firms were not included in the quantitative analysis.
Finally, this strand used survey data provided by the World Bank. Survey responses are susceptible to bias, and findings may have been impacted by social desirability bias (Truex, 2011). In addition, since questions on corruption are sensitive, it is possible that respondents underreported levels of bribery, even though the World Bank assures confidentiality of survey responses (World Bank Group, 2013). While the survey questions were relevant for a study on the effects of exogenous factors on bribing activity and the effects of bribing activity on firm performance, they were not specifically designed for this study. It would have been interesting to have had access to other facets of firm performance, such as growth in profitability. It would also have been interesting to have had access to data on how much of firm performance was caused by organic growth and how much was caused by acquisition.
For the quantitative+Qualitative strand, given the sensitivity of corruption, it is possible that respondents were not forthright in the discussions. They may not have trusted me and could have provided answers that they felt would keep them safe. Or they
128 might have succumbed to social desirability bias, and provided answers they thought were appropriate rather than honest (Grimm, 2010).
A second limitation is that, as for the Qualitative strand, having lived and worked in corrupt countries and having encountered corruption, I may have inadvertently imposed my personal perspectives on the data interpretation. It is difficult to escape subjectivity when interpreting data (Vandenbroucke, 1998).
A third limitation is that although the 21 interviewed executives represented executives from a large range of industry and size of companies, they were not from a random sample. Rather, they were chosen by local business people with good connections. In addition, the sample may have been too small to have provided a good representation of executives in Kyrgyzstan and Georgia.
A fourth limitation is this strand covered only two former Soviet republics. Like all former Soviet republics, both Kyrgyzstan and Georgia have new governments and are evolving from planned economies to market economies (Brown, 2014), and they may perform differently than countries in other regions of the world. Given the relatively narrow scope of this study, findings may not be as generalizable as findings from studies with broader regional scopes.
For the whole dissertation, one limitation is that it focused only on the supply side of bribing. Bribers, the people paying bribes, were studied. The dissertation did not focus on the demand side- the people receiving bribes. Motivations, behaviors, choices, benefits, and costs of bribers and bribees are different (Lianju & Luyan, 2011; Schulze &
Frank, 2003), and a comparison of the two would have been interesting.
129 Another limitation for the overall dissertation is that in the Implications and
Contributions section, we indicate that bribing activity could be reduced by changing the cost benefit ratio of bribing. Increasing the likelihood that infractions are caught and penalized would increase the costs of bribing. However, this reasoning is linear and often overly simplistic. It does not take into account feedback loops and such measures increase bureaucracy. From a practical standpoint, more bureaucracy will be needed to increase the likelihood of infractions being caught and penalized (Fischel & Sykes,
1996). And as this study illustrated in the Quantitative strand, higher levels of bureaucracy lead to more bribing activity: the direct effect of Bureaucratic Constraints on
Bribing Activity was a significant effect (0.45, p<.001) (see Figure 9 above). Hence, increasing bureaucracy in order to increase the costs of bribing could contribute to increasing bribing activity as well are reducing bribing activity.
The implications section also indicated that benefits of bribing could be reduced by lowering bribers’ trust in government officials to execute promised deals, which could be enacted by implementing more frequent staff rotations in bureaucracies (Tonoyan et al., 2010). However, this too would not be a linear situation. Rather, more staff rotations would require more bureaucracy (Cornell, 2014; Lindquist & Desveaux, 2007). This would create a new feedback loop. More bureaucracy could contribute to increasing bribing activity as well are reducing bribing activity.
Future Research
The small sample of 30 executives in the Qualitative strand makes it difficult to make accurate findings (Hair et al., 2010) on how different criteria such as region, spouse country, educational attainment, and military experience affect the decisions of U.S.
130 expatriate executives. It would be interesting to conduct a quantitative study with a larger sample size and explore these criteria with a more statistically robust sample.
Appendix O provides a breakout of the respondents by region and country.
Appendix P provides a breakout of the respondents by other criteria, such as gender, educational attainment, spouse country, military experience. From these tables, it is evident that some criteria may affect the level of corruption that executives decide to pursue, that some criteria may not affect the level of corruption that executives decide to pursue, and that there appear to be patterns between the different criteria.
Eight criteria appear to affect the level of corruption that executives decide to pursue:
Region – For zero tolerance, South America had the highest percentage (100%) and Russia and Central Asia had the lowest percentage (19%). For succumb to extortion,
Russia and Central Asia had the highest percentage (46%) and South West Asia had the lowest percentage (0%). For pursue corruption, Mideast and South West Asia had the highest percentage (50%) and East Asia had the lowest percentage (11%).
Educational attainment – the three most educated executives, who earned PhDs, had zero tolerance for corruption and decided to not participate.
Executives’ spouse country – five of the seven executives who decided to pursue corruption have foreign spouses from corrupt countries.
Military experience – six of the executives served in the U.S. military, and none of these six decided to pursue corruption.
Number of foreign languages – of the four executives who spoke no foreign languages, none of them pursued corruption.
131 Role at company – all seven of the executives who decided to pursue corruption are senior – either country managers or owners (five of them were owners).
Years of overseas experience – the average years of overseas experience for executives who chose zero tolerance is 11.3 years, for executives who succumbed to extortion is 13.7 years, and for executives who pursued extortion is 17.1 years.
Type of company – All seven executives who pursued corruption worked for small private companies.
In addition, there appear to be patterns between the different criteria:
Foreign languages - All twelve of the people who spoke two or more languages worked at small private companies. Three of the four people who spoke no foreign languages worked at large companies. Everyone who spoke two or more languages had received degrees higher than bachelors.
Foreign spouses – fourteen of the fifteen executives with foreign spouses worked for small companies. All executives with foreign spouses spoke at least one foreign language.
Overseas experience - as can be expected, years of overseas experience and role are related. More experienced executives have more senior roles. There is also a relation between years of overseas experience and age – the people with more overseas experience tend to be older.
Military experience - Four of the six executives with military experience (67%) had foreign spouses, versus 50% of the total study’s executive population. Five of the six executives with military experience spoke at least one language.
132 Regarding the Quantitative strand, it would be interesting to conduct a global study. Results from the former Soviet republics could be compared with those of other corrupt regions of the world, such as east Asia, southwest Asia, west Africa, and east
Africa. World Bank Enterprise Surveys has data for most countries in the world. A cross regional study would enable us to explore whether findings are relevant across multiple regions and to put them into wider socio-political context.
Since the former Soviet republics have suffered from corruption for a long time
(Feldbrugge, 1984; Simis, 1977) and suffer from path dependency (Bardhan, 2006), there would be value in adding sequential time periods in a longitudinal analysis (McMann,
2018). This study uses only 2013 data. Using 2009 data and 2005 data as well would enable us to examine how bribing activity is trending over time and to determine the strength of path dependency.
For the quantitative+Qualitative strand, the small sample of 21 executives precludes making actual inferences (Hair et al., 2010) about how different criteria such as gender, industry, role at company, size of company, age of company, age of interviewee, educational attainment, and amount of Western education affect the decisions of local
CEOs and owners in Kyrgyzstan and Georgia. It would be interesting to conduct a qualitative study with a larger sample size and explore these criteria with a more statistically robust sample. A larger sample size would also enable the study of why interview results did not always align with quantitative results, such as the circumstance in Georgia, where the quantitative study indicated that informal competition had a significant positive effect on bribing activity, whereas none of the interviews indicated that informal competition occurred.
133 Since Kyrgyzstan and Georgia have suffered from corruption for a long time
(Feldbrugge, 1984; Simis, 1977) and suffer from path dependency (Bardhan, 2006), there would be value in adding sequential time periods in a longitudinal analysis. Conducting interviews in future years would enable us to examine how bribing activity is trending over time and to determine the strength of path dependency.
As noted in the Limitations section, this dissertation studied the causality between
Bribing Activity and Firm Performance. However, it did not study the reverse causality between Firm and Performance and Bribing Activity. As firms attain higher performance, they may in turn bribe at higher levels (Martin et al., 2007). This would be a relevant causality to explore and to account for.
It would be interesting to explore feedback loops. As mentioned in the
Limitations section, higher levels of bureaucracy could come from efforts to increase costs of bribing and from efforts to decrease benefits of bribing (Cornell, 2014; Fischel &
Sykes, 1996; Lindquist & Desveaux, 2007). As seen in the Quantitative strand, these higher levels of bureaucracy designed to lower bribing activity could lead to higher levels of bribing. Another feedback loop may have occurred in Georgia after the Rose
Revolution. As bureaucratic constraints were reduced, bribing activity declined
(Kupatadze, 2012), which, in turn, could have improved the economy (Drury,
Krieckhaus, & Lusztig, 2006; Shao, Ivanov, Podobnik, & Stanley, 2007). It would be interesting to explore if this, in turn, contributed to a reduction in bureaucratic constraints which could have set the stage for a virtuous cycle of lower bribing activity and economic improvement. It would also be interesting to explore the interactive system that exists from bribing activity being good for the firm (as seen in the Quantitative strand),
134 but being harmful for the country (Djankov et al., 2002; Gupta et al., 1998; Shleifer &
Vishny, 1993).
It would be valuable to delve more into how the three theories utilized in this study (Institutional, Ethical, and Social Norm) address the three levels of analysis
(individual, firm, and country). For example, Ethical Theory was used to explore motivations and behavior of the individual, but was not used to address firm and country behavior.
This study discussed how the Rose Revolution provided an institutional shock that enabled Georgia to significantly reduce its level of corruption (Cornell & Nilsson,
2009; Lanskoy & Areshidze, 2008). However, the study did not make rigorous use of institutional theory and how the Rose Revolution changed how norms, beliefs, and related rule systems and organizations affected corrupt activity. Nor did it delve into how the individual, the firm, and the country interacted in a complex multilevel situation.
Exciting studies could be developed from delving into these aspects of the Rose
Revolution.
While Georgia was successful in reducing corruption after its Rose Revolution,
Kyrgyzstan was unable to reduce its level of corrupt activity (Bleck & Logvinenko, 2018;
Cokgezen, 2004). It would be interesting to explore the qualitative and quantitative differences between the two countries and illustrate how the two countries performed so differently.
Finally, the interviews were conducted in 2019, and the Quantitative study used data from 2013. The World Bank expects to provide new data for Kyrgyzstan and
Georgia in September 2019. It would be exciting to analyze this data and to compare
135 results with the findings from the 2013 data, and with the findings from the 2019 interviews. In addition, using longitudinal data can improve reliability and validity
(Single, Kandel, & Johnson, 1975; Willett, 1989).
136 Appendix A: Summary of Articles
Articles were found through citations in other articles, by suggestions from scholars providing advice on this paper, through Google Scholar, and through the
EBSCO data base. For each article, the review provides a summary of objectives, research method, sample, whether the focus is on the briber or the bribee, unit of analysis, whether the focus is theoretical or empirical, theories used, constructs used, findings, and comments. This coding enables us to gain an understanding of current research and to observe gaps in literature.
137 Summary of Articles Research Bribee/ Unit of Theoretical Article Objectives Method Sample Briber Analysis /Empirical Theory Constructs Findings Comments C O R R U P T I O N A R T I C L E S Ajie, H., & Wokekoro, O. 2012. The impact of corruption on sustainable economic growth What is the impact of Instead of focusing on and development in Nigeria. corruption on investigation, arrest, and International Journal of sustainable economic DV=corruption prosecution, anti corruption Economic Development growth and Data from Central Bank IVs=GDP, unemployment rate, measures should focus on Research and Investment , development in secondary of Nigeria debt stock, government Corruption is responsible for Nigeria's prosecuting anyone regardless 3(1): 91-109 Nigeria? sources publications Bribee Country Empirical Economic theory expenditure, political stability underdevelopment of their tribe, religion, or party DV=corruption level IVs=investment, GDP, judicial What are determinants efficiency, secondary school Ali, A. M., & Isse, H. S. 2002. of corruption and how Panel data - enrolment rate, gov expenditure Corruption is negatively and significantly Determinants of economic do they explain comparison of as % GDP, index of pollical correlated with level of education, judicial corruption: A cross-country differences in studies in the freedom, population growth rate, efficiency, economic freedom. It is comparison. Cato Journal , corruptions across 1990's with those ethnolinguistic fractionalization, positively and significantly correlated with Interesting that foreign aid 22(3): 449-467 countries? in the 1980's 38 countries Bribee Country Empirical type of state, economic freedom foreign aid and size of government. positively affects corruption. Efficiency wage strategy (paying higher Besley, T., & McLaren, J. wages to get less corruption from tax 1993. Taxes and bribery: the How can tax Bargaining collectors) may not be most efficient way role of wage incentives. The compliance be theory, to increase tax collection. May be more economic journal , 103(416): increased when tax Theoretical capitulation wage efficient to pay low wages and to monitor 119-141. collectors are corrupt? construct N/A Bribee Individual Theoretical theory tax collectors. Cheung, Y. L., Rau, P. R., & Stouraitis, A. 2012. How much DVs=bribe size, benefits of bribe do firms pay as bribes and what IVs=firm performance, political benefits do they get? Evidence What factors influence 166 prominent freedom, democracy score, GDP Magnitude of bribes and benefits that firms from corruption cases size of bribes and what bribery cases per capita, director liability, receive affected by firm performance, rank worldwide: National Bureau of are benefits that firms across 52 Firm and customs burden, legal rights, legal of politicians bribed, bribe-paying and bribe Economic Research derive from them? Case studies countries Briber Country Empirical Economic theory efficiency, police reliability taking country characteristics DVs=# of ISO certifications, water pollution, accidental What are poisoning deaths, intestinal Countries with higher regulation of entry consequences of Regulation theory, infection deaths, unofficial have higher corruption and larger unofficial Djankov, S., La Porta, R., regulation of entry and public interest economy as % of GDP, economies. They do not have better quality Lopez-de-Silanes, F., & who gets the rents? Survey data - theory, public unofficial economy employment public or private goods. This supports public Shleifer, A. 2002. The Review if collection of World Bank, choice theory, size, product market competition. choice theory and tollbooth theory that Records all procedures regulation of entry. The bribes in exchange for USAID, regulatory IVs=log # of procedures a firm entry regulation benefits politicians and required to set up a new Quarterly Journal of release from regulation government web capture theory, must complete, log GDP per bureaucrats. It does not support public company, calculates Economics , 117(1): 1-37. is efficient pages 85 countries Bribee Country Empirical tollbooth theory capita interest theory of regulation. associated costs and time
138
Summary of Articles Research Bribee/ Unit of Theoretical Article Objectives Method Sample Briber Analysis /Empirical Theory Constructs Findings Comments C O R R U P T I O N A R T I C L E S Fagbemi, T. O., Uadiale, O. M., & Noah, A. O. 2010. The To decrease tax evasion, the ethics of tax evasion: government should 1) be Perceptual evidence from Understand the 127 business accountable and transparent 2) Nigeria. European Journal of behaviour of taxpayers owners across ensure tax system is fair 3) Social Sciences , 17(3): 360- towards tax evasion in Nigeria's 36 There is wide spread ethical support for tax make populace aware that tax 371 Nigeria Survey tax offices Briber Individual Empirical evasion evasion is a serious crime Survey data - Jakarta Stock Exchange (JSX) When there was news concerning troubles data, JSX group with Suharto's health, the overall stock affiliations, market dropped. Firms that were politically political connected dropped more than other firms. Fisman, R. 2001. Estimating the dependence of Assuming perceive corruption is a proxy value of political connections. Do firms benefit from JSX firms, events DV=firm stock price for prevalence of political rents, political The American Economic having strong political related to 76 Indonesian IV=news concerning troubles connections may play an important role in Review , 91(4): 1095-1102. connections? Suharto's health firms N/A Firm Empirical with Suharto's health major economies. DVs=corruption an obstacle to doing business, bribery is Gaviria, A. 2002. Assessing the common, government agency Accesses whether crime and effects of corruption and crime Survey data - requested bribes, crime an corruption affect sales, on firm performance: evidence World Bank and obstacle for doing business. investment, and employment from Latin America. Emerging Accesses effects of Inter-American IVs=sector, size, location, firm Corruption and crime reduce sales growth. growth. Studies whether Markets Review , 3(3): 245- corruption on economic Development 2671 firms in age, foreign ownership, exports, Reported levels of corruption is positively bribes reduce bureaucratic 268. prospects of firms Bank 29 countries Briber Firm Empirical state sector sales correlated with bureaucratic interference. interference. DVs=real sales and labor Hanousek, J., & Kochanova, A. 446,205 firms productivity growth 2016. Bribery environments and from Central IVs=sales growth, productivity firm performance: Evidence and Eastern growth, total assets, employees, from CEE countries. Survey data - Europe and profitability, market share, Higher bribery mean in a local market European Journal of What is the effect of World Bank and former Soviet leverage, cash flow, bribery lowers real sales and labor productivity Political Economy , 43: 14- bribing on firm Amadeus Union mean, bribery dispersion, rule of growth. This effect is smaller in countries 28. performance? database countries Briber Firm Empirical law with weaker institutions. Topic highly relevant
Hellman, J. S., Jones, G., & Many transition economies have capture Kaufmann, D. 2003. Seize the What is the nature of economies, where private firms buy rent- state, seize the day: state relationships between generating advantages from public officials. capture and influence in the state and firms in Regulation theory, DVs=state capture, influence Captor firms receive more property rights transition economies. Journal transition economies, 2081 firms in regulatory IVs=origin, size, sector, protection and better firm performance. of comparative economics , specifically with state Survey data - transition capture theory, bureaucracy, overall bribe However, state capture is associated with 31(4): 751-773. capture and influence? World Bank economies Briber Firm Empirical incentive theory payments, sales, assets weaker economy-wide firm performance.
139
Summary of Articles Research Bribee/ Unit of Theoretical Article Objectives Method Sample Briber Analysis /Empirical Theory Constructs Findings Comments C O R R U P T I O N A R T I C L E S Kaufmann, D., Hellman, J. S., Jones, G., & Schankerman, M. Shows relationship between firm A. 2000. Measuring characteristics (ownership, control, size, governance, corruption, and sector, etc) and effects of interactions with state capture: How firms and the state. Investigates types of services bureaucrats shape the business 3000 firms in which firms buy with bribes. Provides A descriptive paper environment in transition 20 Eastern DV=Firms' interactions with the micro-economic perspective on costs and summarizing results of World economies: April 2000, World Assess governance European and state benefits to firms from corruption. Bank survey. Focuses on Bank Policy Research Working and corruption from the Survey data - Central Asian Firm and IVs=characteristics of firms Empirically analyses problem of state governance, corruption, and Paper No. 2312. perspective of firms World Bank countries Briber Country Empirical (ownership, control, size, sector) capture. state capture
DV=Bribery activity Martin, K. D., Cullen, J. B., IVs=Country level (achievement Johnson, J. L., & Parboteeah, orientation, ingroup collectivism, K. P. 2007. Deciding to bribe: humane orientation, welfare Useful article. A cross-level analysis of firm socialism, political constraints) Anomoie theory gives an and home country influences on Anomie theory, Firm level (financial constraints, Country level cultural and institutional explanation for why bribery bribery activity. Academy of Why does bribing of multilevel competitive intensity). drivers encourage firm level bribery. Firm thrives even though it is Management Journal , 50(6): public officials differ Survey data - 3769 firms in Firm and organization Moderators=welfare socialism, level pressures encourage bribing as a firm universally denounced as 1401-1422 among countries? World Bank 38 countries Briber Country Empirical theory political constraints strategy. wrong DV=total investment/GDP IVs=political change-institutional, Survey data - political change-social, probability Business of opposition group takeover, There is a negative and significant Mauro, P. 1995. Corruption and International stability of labor, relationship with association between corruption and growth. The Quarterly What effect does (now part of neighboring countries, terrorism, investment rate. There is weak support for Journal of Economics , corruption have on Economist Collective legal system, bureaucracy, hypothesis that corruption reduces growth 110(3): 681-712. growth? Intelligence Unit) 68 countries Briber Country Empirical reputations theory corruption by leading to inefficient investment choices.
Observes that corruption is less harmful to Assesses technical efficiency Tests whether efficiency where institutions are less of countries by measuring how corruption greases the Uses stochastic effective. Does not find evidence that close production is to what Meon, P.-G., & Weill, L. 2009. wheels or sands the frontier approach corruption sands the wheels on government optimal production would be. Is Corruption an Efficient wheels of otherwise to measure effectiveness but does find evidence that Uses data on corruption, Grease? World Development , deficient institutional aggregate corruption greases the wheels of quality of governance, and 38(3): 244-259. frameworks. efficiency 69 countries Bribee Country Empirical government effectiveness. macroeconomics. Organization theory, network theory, Park, S. H., & Luo, Y. 2001. transaction cost DVs=profit growth, sales growth Guanxi and organizational theory, population IVs=ownership structure, Guanxi enhances firm growth in terms of dynamics: Organizational ecology theory, location, strategy orientation, size, market expansion. It does not improve networking in Chinese firms. What is the impact of resource technology skills, managerial profit margin. Guanxi supports the law of Strategic Management quanxi on firm 128 firms in dependence skills, length of operation, reciprocity - firms are obligated to return 140 Journal , 22(5): 455-477. performance? Survey central China Briber Firm Empirical theory industry growth, industry type favors to maintain trust and not lose face.
Summary of Articles Research Bribee/ Unit of Theoretical Article Objectives Method Sample Briber Analysis /Empirical Theory Constructs Findings Comments C O R R U P T I O N A R T I C L E S DVs=return on assets, market Peng, M. W., & Luo, Y. 2000. share Managers' ties with government officials Managerial ties and firm Social network IVs=ties with managers at other are more important than ties with managers performance in a transition How do managers' ties theory, firms (buyers, suppliers, at other firms. Despite significant costs economy: The nature of a micro-with government transaction cost competitors), ties with associated with building and maintaining macro link. Academy of officials and managers Top managers theory, government officials (political relationships with officials (gifts, banquets, Management Journal , 43(3): at other firms effect at 127 Theoretical organization leaders, industrial bureau bravery) firms still improve firm 486-501. firm performance? Survey Chinese firms Briber Individual and empirical theory officials, regulatory officials) performance. Fraud triangle theory, rational Illuminate behavioural choice theory, Prabowo, H. Y. 2014. To be elements of corruption, Indonesian game theory, When individuals exposed to corrupt or not to be corrupt. especially decision Corruption differential pressure/motivation, opportunity and Journal of Money making process, to Eradication association rationalization to act corruptly, they Laundering Control , 17(3): create corruption Commission theory, social consider benefits and costs before deciding Useful table on benefits versus 306-326 eradication strategies Case studies investigations Bribee Individual Empirical dominance theory to participate in corruption or not. costs of accepting bribes Safavian, M. S., Graham, D. H., & Gonzalez-Vega, C. 2001. Illustrate how The best protection against Corruption and microenterprises regulatory-induced Survey - Ohio 304 registered DV=firm's ranking of corruption regulatory harassment is in Russia. World corruption affects State Policy microenterpris as a problem Russian corruption, similar to a regressive having diverse sources of Development , 29(7): 1215- microenterprises in Initiative in es in Samara IVs=firm growth, # of monthly tax, acts as a disincentive to innovation and income which enable a 1224. Russia Russia City, Russia Briber Firm Empirical inspections, other income, size growth credible threat of exit Firms that paid bribes for business Regresses World Bank Seker, M., & Yang, J. S. 2012. Tests how corruption 11,368 firms transactions such as installing utility Enterprise Survey data to How bribery distorts firm affects economic in 29 LAC DV=sales growth connections had a 24% lower annual sales determine effect of bribing growth: differences by firm performance at the Survey data - developing Regulatory IV=firm individual bribery growth than firms that did not pay these solicitation on 2 years sales attributes firm level World Bank countries Briber Firm Empirical capture theory statistic bribes. growth. Efficiency of financial and legal systems effects likelihood of engaging in corruption. Closed social networks enable Tonoyan, V., Strohmeyer, R., entrepreneurs to justify corrupt activity. Habib, M., & Perlitz, M. 2010. DV=Corruption For corruption to be desirable, it is Corruption and IVs=quality of financial important to have a trustworthy bribee who entrepreneurship: How formal institutions, quality of legal delivers services per agreement. and informal institutions shape institutions, time for red tape, Governments can reducing bribing activity DV=Corruption has only one small firm behaviour in legal alternatives to bribes, by making it less likely for bureaucrats to item: question “It is common transition and mature market competitor's unfair play, shadow honour their agreements by making for firms in my line of business economies. Entrepreneurship Why do small business economy, investment made by implementation of legal sanctions to have to pay some irregular theory and practice , 34(5): owners engage in Survey data - 2576 firms in Economic theory, families and friends, trust asymmetric. Also, by increasing regular ‘additional payments’ to get 803-832. corrupt deals? World Bank 20 countries Briber Firm Empirical game theory towards public officer staff rotations. things done.”
141
Summary of Articles Research Bribee/ Unit of Theoretical Article Objectives Method Sample Briber Analysis /Empirical Theory Constructs Findings Comments C O R R U P T I O N A R T I C L E S DVs=perceived corruption index, % respondents reporting "a lot' of Survey = cases of corruption in their Treisman, D. 2000. The causes Why is corruption more Transparency country More corrupt contries are federal states. of corruption: A cross-national common in some International, IVs=never a colony, Protestant, Less corrupt countries have protestant study. Journal of Public countries than in World Bank, GDP per capita, federal, traditions, histories of British rule, more Economics , 76(3): 399-457. others? Gallup 148 countries Bribee Country Empirical democracy, imports/GDP developed economies, higher imports. Cited by 4421 Ufere, N., Perelli, S., Boland, Capture theory, R., & Carlsson, B. 2012. Qualitative institutional Merchants of corruption: How research theory, Entrepreneurs are not victims of entrepreneurs manufacture and Access how corruption approach utilizing structuration government agents demanding bribes. supply bribes. World is experienced by semi structured 32 Nigerian theory, behavioral Rather, they activity perpetrate bribery Development, 12: 2440-2453. Nigerian entrepreneurs interviews entrepreneurs Briber Individual Empirical theory using "bribery best practices". Williams, C. C., & Martinez- Perez, A. 2016. Evaluating the impacts of corruption on firm performance in developing economies: an institutional Determines if paying DVs=sales growth, employment perspective. International bribes compensates for 106,805 firms Institutional growth, productivity growth. Paying corrupt officials enhances firm Journal of Business and formal institutional Survey data - in 132 theory, utilitarian IVs=graft incidence, perceived performance. Bribes compensate for Regresses World Bank Globalisation , 16(4): 401-422. imperfections World Bank countries Briber Firm Empirical theory of crime need to make bribes. formal institutional imperfections. Enterprise Survey data. Bribery hurts firm growth for small and medium-sized firms but does not hurt Zhou, J. Q., & Peng, M. W. growth for large firms. Poor financial 2012. Does bribery help or hurt DVs=level of bribery, sales market, high policy uncertainty, weak legal firm growth around the world? growth system significantly increase firms' bribery Asia Pacific Journal of Resource IVs=financial market levels. Firms use more bribery when in Hypotheses were tested with Management , 29(4): 907- Does bribery hurt or Survey data - 2686 firms in dependence development, policy uncertainty, under-developed market-supporting Hierarchical Linear Model 921. help firm growth? World Bank 48 countries Briber Firm Empirical theory quality of legal system institutions. (HLM) I N S T I T U T I O N A L T H E O R Y A R T I C L E S Formal firm performance positively affected by high intensity of informal DV=labor productivity (total competition coupled with low labor sales/# employees) regulation. Or, is positively affected by low 16,171 firms IVs=firm size, years of manager intensity of informal competition coupled Ali, N., & Najman, B. 2014. in 41 sub experience, firm owner gender, with severe labor regulation. Smaller formal Informal Competition and How do informal firms Saharan obstacles (access to finance, firms are more susceptible to negative Productivity: A double-edged affect performance of Survey data - African Human capital licensing procedures, taxes, effects than larger firms of effects of Presence of informal firms not sword. formal firms? World Bank countries N/A Firm Empirical theory corruption, crime) informal firms as harmful as was expected
142
Summary of Articles Research Bribee/ Unit of Theoretical Article Objectives Method Sample Briber Analysis /Empirical Theory Constructs Findings Comments I N S T I T U T I O N A L T H E O R Y A R T I C L E S Beck, T., Demirgüç‐Kunt, A., & Maksimovic, V. 2005. Financial and legal constraints What are the effects of to growth: Does firm size financial, legal, and Over 4,000 DV=sales growth Financial, legal, and corruption problems all matter? The Journal of corruption problems on Survey data - firms in 54 Corporate finance IVs=Financing (12 items), Legal negatively affect firm growth. Smallest Finance , 60(1): 137-177. firm growth? World Bank countries Briber Firm Empirical theory (11 items), Corruption (9 items) firms are most constrained. Different constraints affect development differently across different countries: transport important for war-torn countries, Carlin, W., Schaffer, M., & crime and corruption important especially in Seabright, P. 2007. Where are Central and Latin America, poor admin of the real bottlenecks? Evidence DVs=Sales, Managers' tax system important in the CIS, labor from 20,000 firms in 60 assessment of cost of constraints regulation important only for prosperous countries about the shadow Over 20,000 IVs=Foreign owned, state, new countries. More efficient firms especially costs of constraints to firm What constrains Survey data - firms in 60 private, big city, access to affected by poorly functioning customs performance growth to firms? World Bank countries N/A Firm Empirical finance regulations and legal systems What are the reasons When institutions function effectively, it Helmke, G., & Levitsky, S. and mechanisms need not be only formal rules that drive 2004. Informal institutions and behind the creation of actors' behaviour - underlying informal comparative politics: A research formal institutions, and Abstract theory, norms can enable and constrain as well. agenda. Perspectives on the nature of the Theoretical rational choice Informal institutions also shape political politics , 2(4): 725-740. stability and change? construct N/A N/A Firm Theoretical theory behaviour and outcomes.
DVs=firm performance (profit Firm performance is positively affected by per worker and sales per skilled workforce, firm age, firm size, worker), has firm paid bribes foreign ownership, capital investment. Firm (binary 1 or 0) performance is negatively affected by poor Okafor, G. 2017. The Economic theory, IVs=degree of competition, firm electricity delivery and difficulty in determinants of firm monopolistic age, firm size, foreign ownership, obtaining capital. performance and bribery: What are determinants competition use of foreign technology, capital Likelihood to pay bribes positively affected Evidence from manufacturing of firm performance 1424 theory, human intensity, skilled production by time spent dealing with government firms in Nigeria. International and the determinants of manufacturing capital theory, workforce, infrastructure quality, regulations, sales volume, amount of capital Economic Journal , 31(4): 1- likelihood of firms Survey data - firms in corporate finance access to credit, % of goods asset investment. Foreign owned firms as 23. paying bribes? World Bank Nigeria Briber Firm Empirical theory exported likely as locally owned firms to pay bribes. Many IVs! Okpara, J. O., & Wynn, P. 2007. Determinants of Small Business Growth Constraints in Key factors causing business failure are a Sub-Saharan African DV=Business performance lack of financial support, lack of Economy. SAM Advanced What factors cause 396 small IVs=financial resources, management experience, corruption, lack of Management Journal , Sprint: Nigerian businesses to businesses in management experience, infrastructure, lack of training, inadequate Corruption is peripheral topic 24-35. fail? Survey Nigeria Briber Firm Empirical corruption, infrastructure bookkeeping of this article
143
Summary of Articles Research Bribee/ Unit of Theoretical Article Objectives Method Sample Briber Analysis /Empirical Theory Constructs Findings Comments I N S T I T U T I O N A L T H E O R Y A R T I C L E S Shadow economies are increasing as a percent of GNP across the world. They are increasing because 1) burden of tax 76 developing, payments and social security payments are transition, and Indicators=discrepancies rising 2) there are more labor market Organization between national expenditure and restrictions such as forced reduction in Shadow economies contribute Direct micro for Economic income statistics, official and working hours 3) decline of civic virtue and to official GNP but are Schneider, F., & Enste, D. economic surveys Cooperation Reactance actual labor force, volume of loyalty towards public institutions. Size of currently unregistered. 1999. Shadow economies What are the sizes of and indirect and theory, public transaction and official GNP, shadow economies range from 12% of Growing shadow economies around the world: size, causes shadow economies and macro economic Development choice theory, currency demand, physical input GDP for OECD to 39% for developing have a positive impact on level and consequences. why are they growing? indicators countries N/A Country Empirical statistical theory (electricity demand) countries of corruption. E T H I C A L T H E O R Y A R T I C L E S People reduce tension between behaving honestly and maximizing self-interest by Unethical behaviour Self-concept behaving unethically enough to benefit and Ayal, S., & Gino, F. 2011. such as cheating, fraud, maintenance ethically enough to keep a positive self- Honest rationales for dishonest racketeering, and other theory, social image. People 1) take advantage of behaviour. The social forms of dishonesty norm theory, ambiguity surrounding dishonest behaviour psychology of morality: create enormous social-identity 2) use social context to justify unethical Exploring the causes of societal challenges. theory, moral behaviour or balance it with pro-social good and evil. Washington, How are people able to hypocrisy theory, behaviour 3) distance themselves from DC: American Psychological justify acting Experiments and Multiple cognitive unethical behaviour by confessing and Association : 149-166. unethically? case studies studies Briber Individual Empirical dissonance theory acting ethically People tend to overlook unethical behavior Gino, F., Moore, D. A., & even when they recognize that it would Bazerman, M. H. 2009. See no harm them. People have a tendency to 1) evil: When we overlook other ignore unethical behavior when ethicality people’s unethical behaviour. erodes over time 2) ignore unethical Social decision making: behavior unless it is clear and direct, 3) Social dilemmas, social How do people Utility theory, assess unethical behavior only after it values, and ethical overlook unethical Multiple social value results in bad outcome but not during the judgments : 241-263. behavior of others? Case studies studies N/A Individual Empirical orientation theory decision process Companies engage in CSR to offset CSI. Kotchen, M., & Moon, J. J. Do companies engage 7 issue areas - community, This effect is strongest in industries where 2012. Corporate social in Corporate Social corporate governance, diversity, CSI undergoes greater public scrutiny. responsibility for irresponsibility. Responsibility (CSR) to Survey data - Economic theory, employee relations, environment, When CSI comes from corporate The BE Journal of Economic offset Corporate Social KLD Social 3,000 public environmental human rights, product quality and governance, firms offset with CSR rather Analysis & Policy , 12(1). Irresponsibility (CSI)? Ratings Database companies N/A Firm Empirical offsets theory safety than reforming governance.
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Summary of Articles Research Bribee/ Unit of Theoretical Article Objectives Method Sample Briber Analysis /Empirical Theory Constructs Findings Comments E T H I C A L T H E O R Y A R T I C L E S Investigate the ethicality of BRIC firms using favors to McCarthy, D. J., Puffer, S. M., accomplish business Dunlap, D. R., & Jaeger, A. M. objectives. Moral Institutional BRIC managers generally consider the use 2012. A stakeholder approach reasoning should be theory, agency of favors to be ethical when doing business to the ethicality of BRIC-firm applicable to emerging theory, ethical within their own country, with people form managers’ use of favours. BRIC economies Briber theory, integrative other emerging economies, and with people Journal of Business Ethics , rather than to Theoretical and social contracts from developed countries. They generally Provides good background on 109(1): 27-38. developed countries constructs N/A bribee Individual Theoretical theory consider the use of bribes to be unethical. institutional theory Moscovici, S., & Faucheux, C. 1972. Social influence, conformity bias, and the study Behavioral style is an important source of of active minorities, Advances social influence. Inference effects - in experimental social inferences that people have about others psychology , Vol. 6: 149-202: What factors affect Experiments and Multiple Social norm and their environment play a role in Elsevier. social influence? case studies studies N/A Individual Empirical theory assigning attributes. Simon, H. A. 1972. Theories People are rational, but boundedly so. of Bounded Rationality . Bounded People are also bounded ethically. People’s United States of America: rationality theory, rationality is bounded by available North-Holland Publishing How are people's Experiments and Multiple rational choice information, cognitive ability, and amount of Company. decisions bounded? case studies studies N/A Individual Empirical theory time
Tyson, T. 1990. Believing that Workers believe that they are more ethical everyone else is less ethical: If everyone believes than their co-workers and managers. Implications for work behaviour they are more ethical Having a "holier than thou" ethical and ethics instruction. Journal than others, how does 135 perception, people rationalize their unethical of Business Ethics , 9(9): 715- this affect work undergraduate behavior as necessary to succeed in an 721. behavior? Survey students Briber Individual Empirical unethical world. S O C I A L N O R M T H E O R Y A R T I C L E S If firms have social ties with Collins, J. D., Uhlenbruck, K., government officials, they are & Rodriguez, P. 2009. Why DV=likelihood of engaging in Degree of corrupt activity driven by familial more likely to participate in firms engage in corruption: A How do social ties and Social norm corrupt activities ties to government officials, perception of corruption and are likely to top management perspective. perceptions of 352 theory, IVs=% revenues from corruption as acceptable, involvement in rationalize being corrupt as Journal of Business Ethics , corruption shape executives in organizational government, managers' social political parties, affiliation with professional necessary for being 87(1): 89-108. corrupt activity? Survey India Briber Individual Empirical theory ties with government officials organizations. competitive.
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Summary of Articles Research Bribee/ Unit of Theoretical Article Objectives Method Sample Briber Analysis /Empirical Theory Constructs Findings Comments S O C I A L N O R M T H E O R Y A R T I C L E S Dong, B., Dulleck, U., & Panel Data: Torgler, B. 2009. Social Micro survey= DV=justifiability of corruption norms and corruption . Paper European Values IVs=perceived share of presented at the Proceedings Survey and compatriots receiving bribes, The decision to bribe bureaucrats depends of the European Economic Is corruption Worlds Values Social norm education level, political interest, on the frequency of societal corruption. Association and the contagious and does Survey. Over 1000 Briber theory, contagion age, gender, marital status, Corruption is influenced by perceived Econometric Society European conditional cooperation Macro survey= individuals in and Theoretical theory, economic employment status, risk attitudes, activities of peers. Past levels of corruption Meeting matter? ICRG data 50 countries bribee Individual and empirical theory urbanization, religion, geography impact current levels of corruption Both theoretical and empirical DV=resulting deviant commitments IVs=societal conductiveness, performance emphasis, The created theoretical model is prepared Contingency performance pressures and for subsequent empirical research. The Finney, H. C., & Lesieur, H. R. theory, barriers, perceived operating theory is integrated, multi-variate, 1982. A contingency theory of organization problems, controls, decision developmental, and contingent and aligns organizational crime. Research theory, processes, crime, legal action, with research on organizational crime and in the Sociology of What are the causes of Theoretical criminology organizational defence, societal with criminology theory and sociology of Organizations , 1: 255-299. organizational crime? construct Briber Firm Theoretical theory reactions organizations.
Greppin, C., Carlsson, B., How do US expatriates Wolfberg, A., & Ufere, N. working in dangerous 2017. How expatriates work in environments of dangerous environments of pervasive corruption pervasive corruption. Journal deal with the 30 US Some executives refused to participate in of Global Mobility: The phenomena and make executives Social norm corruption, others reluctantly succumbed to Home of Expatriate decisions about the working in theory, fraud extortion, and other willingly participated in Management Research , 5(4): degree to which they Semi-structured corrupt triangle theory, corruption. Social norms played a 443-460. get involved interviews countries Briber Individual Empirical grounded theory significant role in their decisions. Do ‘economic ‘If I receive it, it is a gift. If I demand Polese, A. 2008. 'If I receive it, transactions’ reported it, then it is a bribe’. Given the low salaries it is a gift; if I demand it, then it as bribes have a Ukrainian in medicine, education, and policework, is a bribe': On the Local deeper meaning when university, gifts are needed exchange. For example, Corruption needs to be Meaning of Economic analysed within the hospital, and Corruption doctors would leave Ukraine if they were redefined when dealing with Transactions in Post-Soviet framework of gift police control development unable to accept gifts to supplement their cases in which it helps people Ukraine: Berghahn Journals. exchange? Case studies post Briber Individual Empirical theory income.. survive
DV=acceptance of corruption There is relative consensus that large scale Truex, R. 2011. Corruption, Dimensions=Petty vs grand, gifts bribery is not acceptable, but there is not attitudes, and education: Survey vs cash, public vs private, consensus that smaller scale corruption Improving education may evidence from Nepal. World How does acceptance 853 residents politician vs bureaucrat, deserved such as favoritism, patronage, and petty reduce the presence of Development , 39(7): 1133- of different types of in Kathmandu, vs illicit, giver vs receiver, bribes. More educated respondents were corruption norms and even 1142. corruption vary? Survey Nepal Briber Individual Empirical Formal theory favoritism less accepting of corruption at all levels. corruption itself
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Appendix B: Interview Protocol
Introduction (interviewer): “Hello (name______). Thank you for taking the time to meet with me. I’m really grateful. Before we get started, I would like to go over a few things.” Purpose and Format for the Interview (Interviewer): “As a current student in the Case Western Reserve University Doctor of Management program, I am interested in finding out what it takes to do business overseas and to learn about how you make decisions in response to the business environment there. I will ask you a series of questions asking you to describe important incidents that you feel best answer the question, describing the situations and what you did. I will also ask one or more follow-up questions as you respond. The interview will last an hour to an hour and a half.” Confidentiality (Interviewer): “Everything you share in this interview will be kept in strictest confidence, and your comments will be transcribed anonymously – omitting your name, anyone else you refer to in this interview, as well as the name of any organization. Your interview responses will be included with all the other interviews I conduct." Recording (Interviewer): “To help me capture your responses accurately and without being overly distracted by taking notes, I would like to record our conversation with your permission. Your responses will be kept confidential, but if there is something you would like to share off the record, or not have recorded, please let me know and I will turn off the recorder. If at any time, you are uncomfortable with this interview, please let me know and we can stop the interview. Do you have any questions before we begin?” [start recording prior to question 1] Interview Questions
After introductions, the following questions will be asked: 1. Icebreaker - “Please tell me about yourself and your role at (firm) when you were working and living overseas?” Probing questions to ask if needed: a. “Where did you go to school?” b. “Where did you grow up?” c. “Where have you traveled?” d. “Where have you lived?” e. “How did you get to the position you are holding today?”
2. Critical Incident Questions
Introduction – “The purpose of this interview is find out what it takes to do business overseas and to learn about how you make decisions in response to the business environment there. I am going to ask you questions requesting recollections. Please be as specific as you can. I may ask you clarifying questions.” 147
First question - “Tell me about a specific experience when you conducted business with a government official?” Probing questions to ask if needed: a. “That’s the type of incident that I would like to know more about. Can you discuss the situation, from beginning to end, in detail and in the order it happened?” b. “How did this happen?” c. “How did it start? d. “Who was involved?” e. “What did they say/do?” f. “Can you give me a specific example?” g. “When did this happen?” h. “What was the outcome/result?”
Second question – “Tell me about a specific experience when you conducted business with a commercial official?” Probing questions to ask if needed – same as above
148 Appendix C: Reasons for Zero Tolerance for Corruption
Personal Norms Category Quote - Reasons for Zero Tolerance for Corruption People who are that corrupt are usually very incompetent businessmen, and even with Be pragmatic all these so-called advantages, we really weren't confident that we'd make any money. Relationship As soon as you add any bribery or any corruption, you probably also forfeit the becomes merely relationship you've built with someone, because now it's no longer a personal transaction relationship, it turns into a transaction. The other principle I came to is bribery is just really lazy sales. Bribery is easy. All Bribery is lazy you're doing is you're just a bag carrier. Know not to cross I've always kept a very clear head and understood what is crossing the line and what the line is not crossing the line. More fun to win on It's actually much more fun to win something on your own merits as opposed to win merits something because of a facilitation. From the military, ingrained in me, you're either pregnant, or you're not pregnant, in No grey areas terms of it's either right or wrong and there's no grey areas. It's morally offensive. I just wouldn't do it. Personal ethics But it was just obviously something that was wrong to do. If you want to sleep at night, you don't do anything like that. Yeah, when I say too much at stake, I just look at myself. I have a reputation in the Personal reputation industry. The organization I work for has a reputation and a brand, and you just don't want to be associated with crossing those lines.
149 Appendix D: Reasons for Succumbing to Extortion
Descriptive Norms Category Quote - Reasons for Succumbing to Extortion Act as environment We always figured it goes back to you don't pay bribes unless you have to. If you're the one that's willingly going about it doing it you're part of the problem. Whereas if you're requires being forced into it well you're just doing as the Romans do. So facilitation payments would be like the Taliban dude that stops your truck on the Get shipments highway and says give me 400 bucks or I’m gonna put a grenade through the front of your truck. through I have been having to pay a little bit of money at the shipping stations... they'll keep my stuff in line and it won't move until I give them money. So you could stand your ground and say well I’m not gonna pay a bribe and you would Get visa just deal with the harassment of having to come back all the time and oh we’re gonna schedule you way in advance or you can pay them ten bucks and they do it for you now. Oh my god C, there's a piece of equipment on the air field that's broken that we need to offload the aircraft. The Sudanese are saying they have one but it's going to cost an extra 10,000 bucks." I was like, "Do what you got to do." Get work done You've got on one side the Department of Justice saying that if you pay money to a foreign official you're breaking the law. On the other side you have military contractors who say, "I don't give a fuck. We're fighting the Taliban. I want my buildings now. You either figure it out or you're going to get fired." Well if someone robs you on the street and holds a gun to your head and says, "Give me all your money," is that corruption? On the other hand if someone says, "I am going to confiscate all of your goods in customs and basically investigate this situation until you lose all your contracts unless you pay a bunch of money," in my mind that's the same thing. Keep company We ended paying like five or ten thousand dollars in penalties. It wasn’t a stolen container. open We paid for it and you know as far as we’re concerned they made it up but you know, that’s what they did...And the threat of course was that they were gonna shut you down. These guys showed up to try and destroy us. They already had exactly what they needed. We were in this situation they were like, "Okay, either you pay more than the guys who paid us to destroy you or we're going to destroy you."
150 Appendix E: Reasons for Pursuing Corruption
Descriptive Norms Category Quote - Reasons for Pursuing Corruption When I learned that the inspector of labor had a daughter who was graduating from secretary school Make things work I very happily hired her...I never had any troubles with the inspector of labor during that time. Yeah, that's what we did was we negotiated and basically cut a deal. I don't know, I think spending lots of time in those countries you become a bit pragmatic and a bit Recognize how jaded, and you're like, "Okay, I understand how it's working." That's just the price to be involved It's not like I followed up and tried to create an invoice to cover the payment. The payment did get things work made. The payment was going to get made even if I approved it or not, so it didn't really matter if I was in the process. Respond to What the fuck are you asking so many questions for? Just make the payment. I'm sick of your pressure emails…that guy made me nervous, man. Didn't want to mess with him too much.
151 Appendix F: Constructs Summary
Construct Definition Items External bureaucratic 1) To what degree are tax rates an obstacle to the current operations of this establishment? Bureaucratic demands placed on a 2) To what degree is tax administration an obstacle to the current operations of this establishment? Constraints firm and that are outside Scale: 0=No obstacle, 1=Minor obstacle, 2=Moderate obstacle, 3=Moderate obstacle, 4=Major obstacle, of its control 5=Very severe obstacle, -9=Don’t know, -7=Does not apply 1) Over 2013, please estimate the proportion of this establishment’s working capital that was financed External economic from internal funds or retained earnings (%) Economic factors that affect a firm 2) Over 2013, please estimate the proportion of this establishment’s working capital that was borrowed Constraints and are outside of its from banks (reverse %) control 3) At this time, does this establishment have a line of credit or a loan from a financial institution? (Yes/No) External legal system 1) The court system is quick? Legal System effectiveness factors that 2) The court system is able to enforce its decisions? Effectiveness affect a firm and are out 3) The court system is fair, impartial and uncorrupted? of its control Scale: 1=Strongly disagree, 2=Tend to disagree, 3=Tend to agree, 4=Strongly agree, -9=Don’t know Presence and effect of 1) Does this establishment compete against unregistered or informal firms? (Yes/No) Informal competition from 2) To what degree are practices of competitors in the informal sector an obstacle to the current Competition unregistered or informal operations of this establishment? Scale: 0=No obstacle, 1=Minor obstacle, 2=Moderate obstacle, 3=Major firms obstacle, 4=Very severe obstacle 1) It is said that establishments are sometimes required to make gifts or informal payments to public officials to “get things done” with regard to customs, taxes, licenses, regulations, services etc. On average, what % of total annual sales, or estimated total annual value, do establishments like this one pay Bribing Bribes paid or requested in informal payments or gifts to public officials for this purpose? (%) Payment to be paid 2) In reference to an application for a construction-related permit (or water connection, or electrical connection, or import license, or operating license, or in meetings/tax inspections), was an informal gift or payment expected or requested? Or, was a gift or informal payment made to public officials to "get things done" with regard to customs, taxes, licenses, regulations, services etc. (Yes/No) 1) Thinking now of unofficial payments/gifts that establishments like this one would make in a given year, please tell me how often would they make payments/gifts to deal with customs/imports? 2) Thinking now of unofficial payments/gifts that establishments like this one would make in a given year, Bribing Frequency of paying please tell me how often would they make payments/gifts to deal with courts? Frequency bribes 3) Thinking now of unofficial payments/gifts that establishments like this one would make in a given year, please tell me how often would they make payments/gifts to deal with taxes and tax collection? Scale: 1=Never, 2=Seldom, 3=Sometimes, 4=Frequently, 5=Very frequently, 6=Always, -9=Don't know It is often said that firms make unofficial payments/gifts, private payments or other benefits to public officials to gain advantages in the drafting of laws, decrees, regulations, and other binding government decisions. To what extent have the following practices had a direct impact on this establishment - private
B r i b i n g A c t i v i t y t i v n i A g b t i c Bi r payments/gifts or other benefits to government officials to affect the content of government decrees? 1) Private payments/gifts or other benefits to Parliamentarians to affect their votes Bribing Impact of paying bribes 2) Private payments/gifts or other benefits to government officials to affect the content of government Impact decrees 3) Private payments/gifts or other benefits to local or regional government officials to affect their votes or content of government decrees Scale: 1=No impact, 2=Minor impact, 3=Moderate impact, 4=Major impact, 5=Decisive impact, -9=Don’t know, -7=Does not apply Firm Three year Sales Growth 1) Square root of percent real sales growth between 2010 and 2013, taking into account inflation Performance and Employment Growth 2) Square root of percent permanent employee growth between 2010 and 2013 Firm Age Number of years firm 1) In what year did this establishment begin operations (Control) has been incorporated GDP/Capita Gross Domestic Product 1) 2013 Gross Domestic Product per capita in US Dollars (World Bank data) (Control) per capita
152 Appendix G: Pattern Matrix
Factor Bribing Bribing Bribing Legal System Economic Informal Bureaucratic Frequency Impact Payment Effectiveness Constraints Competition Constraints Cronbach Alpha 0.874 0.943 0.831 0.792 0.564 0.559 0.570 Frequency of unofficial payments/gifts to deal with customs/imports 0.849 Frequency of unofficial payments/gifts to deal with courts 0.845 Frequency of unofficial payments/gifts to deal with taxes and tax collection 0.823 Private payments/gifts/other benefits to Parliamentarians - direct impact 0.914 Private payments/gifts/other benefits to Government officials - direct 0.958 Private payments/gifts/other benefits to local/regional officials -direct 0.891 % of total annual sales paid as informal payment/gift 0.851 Incidence of payment or informal payment request 0.882 The court system is quick 0.830 The court system is able to enforce its decisions 0.654 The court system is fair, impartial and uncorrupted 0.760 Working capital - % Internal funds/Retained earnings 0.690 Reverse working capital - % borrowed from banks 0.901 Line of credit or a loan from a financial institution 0.577 Reverse competition against unregistered or informal firms 0.763 Practices of informal competitors - obstacle to current operations 0.781 Tax rates - obstacle to current operations 0.638 Tax administration - obstacle to current operations 0.653 Extraction Method: Principal Axis Factoring. Rotation Method: Promax with Kaiser Normalization. a. Rotation converged in 6 iterations.
153 Appendix H: AMOS Common Method Bias
154 Appendix I: Corruption Ranking Graph
Transparency International Corruption Perception Index
0=Least Corrupt Percentile, 100=Most Corrupt Percentile
(Transparency International, 2018)
155 Appendix J: Firm and Interviewee Characteristics
Number Criteria Characteristics Kyrgyzstan Georgia Total Total 10 11 21 Male 6 10 16 Gender Female 4 1 5 Services 4 5 9 IT 4 4 Industry Construction 4 4 Finance 1 2 3 Manufacturing 1 1 Owner 6 4 10 Role at CEO 4 4 8 Company Partner 2 2 VP 1 1 Small < 100 6 7 13 Size of Medium 99 to 999 3 2 5 Company Large > 1000 1 2 3 3 to 5 4 4 8 Age of 6 to 10 2 2 4 Company 11 to 20 2 4 6 Over 20 2 1 3 < 40 2 2 4 Age of 40 to 49 3 9 12 Interviewee 50 to 59 5 5 Bachelors 6 3 9 Educational Masters 3 6 9 Attainment JD 1 1 PhD 1 1 2 Western No 7 7 14 Education Yes 3 4 7 No 2 5 7 Interpreter Yes 8 6 14
156 Appendix K: Interview Protocol
Introduction (interviewer): “Hello (name______). Thank you for taking the time to meet with me. I’m really grateful. Before we get started, I would like to go over a few things.” Purpose and Format for the Interview (Interviewer): “As a PhD candidate in the Case Western Reserve University doctoral program, I am interested in finding out what it takes to do business in (Kyrgyzstan/Georgia) based on your experiences of real situations with examples. I will also ask one or more follow-up questions as you respond. I will use the research for writing my final paper and earning my degree.” Confidentiality (Interviewer): “Everything you share in this interview will be kept in strictest confidence, and your comments will be transcribed anonymously – omitting your name, anyone else you refer to in this interview, as well as the name of any organization. Your interview responses will be included with all the other interviews I conduct." Do you have any questions before we begin?”
1. Ice breaker a. “Please tell me about yourself and your role at (firm)? b. “Please tell me the story of how you worked your way up to the position you are holding today?”
2. Questions
Introduction – “The purpose of this interview is to find out what it takes to do business in (Kyrgyzstan/Georgia). I am going to ask you questions about examples and situations. Please be as specific as you can. I may ask you clarifying questions.” Based on your experience of doing business, can you think of examples of how government bureaucracy such as tax administration has affected the ability of firms to do business? a. Can you think of examples of how access to capital has affected the ability of firms to do business? b. Based on your experience with (Kyrgyzstan’s/Georgia’s) legal system, can you think of examples of how it has affected the ability of firms to do business? c. Can you think of examples of how competition from unregistered firms has affected the ability of traditional firms to do business? d. What are the types of gifts or informal payments that firms make? e. Can you think of anything that could be done to reduce the gifts or informal payments that firms make? f. Can you think of examples of firms making gifts or informal payments to address government bureaucracy? g. Can you think of examples of firms making gifts or informal payments in order to get access to capital?
157 h. Can you think of examples of firms making gifts or informal payments to address legal issues? i. Can you think of examples of firms making gifts or informal payments in order to respond to competition from unregistered firms? j. Can you think of examples of how making gifts or informal payments either harmed or improved firm performance? k. Why do firms decide to make gifts or to not make gifts? l. Do people find making gifts or informal payments as bad, or do they see them as just part of doing business? m. Are there any questions you think I should have asked you or topics that I should have included?
Conclusion (interviewer): “(Name______), thank you, again, for taking the time to talk with me today. I’m very grateful. This ends the interview.”
158 Appendix L: Breakout of Examples in Kyrgyzstan
Not Participating Participating In Corruption In Corruption 1st 2nd 1st 2nd Criteria Characteristics Hand Hand Hand Hand Total 9 11 4 2 Male 7 8 2 1 Gender Female 2 3 2 1 Services 1 3 4 IT Industry Construction 6 5 1 Finance 1 1 Manufacturing 1 2 1 Owner 5 7 2 1 Role at CEO 4 4 2 1 Company Partner VP Small < 100 5 7 4 1 Size of Medium 99 to 999 4 4 1 Company Large > 1000 3 to 5 2 4 1 Age of 6 to 10 1 2 2 Company 11 to 20 3 2 2 Over 20 3 3 1 30 to 40 2 Age of 40 to 49 4 5 2 1 Interviewee 50 to 59 5 6 1 Bachelors 4 6 4 1 Educational Masters 2 3 1 Attainment JD PhD 3 2 Western No 9 10 2 2 Education Yes 1 2 No 3 3 2 Interpreter Yes 6 8 2 2 < $100 2 1 Level of $100 to $100,000 3 10 3 1 Corruption > $100,000 4 1 1 1=Low 2=Medium Low Trust Level 3=Medium 1 2 2 1 4=Medium High 2 4 2 5=High 6 5 1
159 Appendix M: Breakout of Examples in Georgia
Not Participating Participating In Corruption In Corruption 1st 2nd 1st 2nd Criteria Characteristics Hand Hand Hand Hand Total 8 9 6 3 Male 8 9 5 3 Gender Female 1 Services 1 3 2 1 IT 6 1 2 1 Industry Construction Finance 1 5 2 1 Manufacturing Owner 3 1 1 Role at CEO 6 4 3 1 Company Partner 1 2 2 1 VP 1 Small < 100 3 3 2 2 Size of Medium 99 to 999 5 3 2 Company Large > 1000 3 2 1 3 to 5 1 2 1 Age of 6 to 10 2 2 Company 11 to 20 5 5 2 1 Over 20 2 2 1 30 to 40 2 2 2 2 Age of 40 to 49 6 7 4 1 Interviewee 50 to 59 Bachelors 2 1 1 Educational Masters 6 9 4 1 Attainment JD 1 PhD 1 Western No 4 3 2 2 Education Yes 4 6 4 1 No 6 1 3 1 Interpreter Yes 2 8 3 2 < $100 2 5 2 0 Level of $100 to $100,000 5 4 3 3 Corruption > $100,000 1 0 1 0 1=Low 2=Medium Low 1 Trust Level 3=Medium 1 4=Medium High 6 7 4 2 5=High 2 2 1
160 Appendix N: Perspectives on Acting Corruptly and Not Acting Corruptly
Finding Number Georgia Acting Corruptly or Not Acting Corruptly Acting corruptly for gain 18 Not acting corruptly for ethical reasons 9 Traffic police take pride in being not corrupt post Rose Revolution 1 Corruption in Georgia after Rose Revolution Commerce and government still corrupt in Georgia 7 Commerce still corrupt in Georgia 5 Government still corrupt in Georgia 2 Corruption still occurring in Georgia 1 Georgia less corrupt after Rose Revolution 1 Corruption in Georgia before Rose Revolution Commerce and government were corrupt in Georgia pre Rose Revolution 1 Government was corrupt in Georgia pre Rose Revolution 2 Traffic police were corrupt in Georgia pre Rose Revolution 2 Education system was corrupt in Georgia pre Rose Revolution 2 State Telecom was corrupt in Georgia pre Rose Revolution 1 Commerce was corrupt in Georgia pre Rose Revolution 1 Passing on cultural norms to next generation 1 Costly to Not Act Corruptly Costly to not act corruptly 2 Kyrgyzstan Acting Corruptly or Not Acting Corruptly Acting corruptly for gain 20 Not acting corruptly for business reasons 2 Not acting corruptly for ethical reasons 2 Not acting corruptly for ethical and business reasons 2 Corruption in Kyrgyzstan Commerce and government corrupt in Kyrgyzstan 9 Commerce corrupt in Kyrgyzstan 8 Government corrupt in Kyrgyzstan 4 Healthcare system corrupt in Kyrgyzstan 2 Education system corrupt in Kyrgyzstan 1 Traffic police corrupt in Kyrgyzstan 1 Costly to Not Act Corruptly Costly to not act corruptly 4
161 Appendix O: Respondent Stratification by Country and Region
N u m b e r * P e r c e n t Succumb Succumb Zero to Pursue Zero to Pursue Region Country Ranking Tolerance Extortion Corruption Tolerance Extortion Corruption Central African Republic 145 1 100% Democratic Republic of Congo 147 1 100% Gabon 99 1 100% Ghana 56 1 100% Guinea 139 1 100% Africa Liberia 83 1 100% Madagascar 123 1 100% Nigeria 136 1 100% South Africa 61 1 100% Uganda 139 1 100% Total Africa 6 1 3 60% 10% 30% Afghanistan 166 2 4 4 20% 40% 40% Russia Kyrgyzstan 123 1 1 1 33% 33% 33% and Russia 119 1 2 2 20% 40% 40% Central Tajikistan 136 1 1 50% 50% Asia Uzbekistan 153 4 2 67% 33% Total Russia and Central Asia 5 12 9 19% 46% 35% China 83 7 1 1 78% 11% 11% Indonesia 88 1 100% Malaysia 54 1 1 50% 50% East Mongolia 72 1 1 50% 50% Asia Philippines 95 1 100% Thailand 76 2 1 67% 33% Total East Asia 11 5 2 61% 28% 11% Iraq 161 1 1 50% 50% Syria 154 1 100% Mideast Turkey 66 1 2 33% 67% Total Mideast 2 1 3 33% 17% 50% Columbia 83 1 100% Guatemala 123 1 100% Haiti 158 1 100% South Honduras 112 1 100% America Peru 88 1 100% Venezuela 158 1 100% Total South America 6 100% South India 76 1 100% West Nepal 130 1 100% Asia Total South West Asia 1 1 50% 0% 50% * Respondents lived and worked in multiple countries
162 Appendix P: Respondent Stratification by Category
N u m b e r P e r c e n t Succumb Succumb Zero to Pursue Zero to Pursue Criteria Characteristics Respondents Tolerance Extortion Corruption Tolerance Extortion Corruption Total 30 16 7 7 100% 100% 100% Male 27 15 6 6 94% 86% 86% Gender Female 3 1 1 1 6% 14% 14% High School 2 1 1 14% 14% Bachelors 7 2 3 2 13% 43% 29% Educational Masters 13 9 1 3 56% 14% 43% Attainment JD 4 2 2 13% 29% PhD 4 3 1 19% 14% United States 14 10 3 1 63% 43% 14% Russia 6 1 2 3 6% 29% 43% Japan 3 1 1 1 6% 14% 14% Brazil 1 1 14% Spouse Canada 1 1 14% Country Germany 1 1 6% South Korea 1 1 6% Uzbekistan 1 1 14% United Kingdom 1 1 6% N/A 1 1 6% Army 3 2 1 13% 14% Military Navy 2 2 29% Experience Air Force 1 1 14% None 24 14 3 7 88% 43% 100% Number of Four 1 1 6% Three 3 2 1 13% 14% Foreign Two 8 3 3 2 19% 43% 29% Languages One 14 6 4 4 38% 57% 57% Spoken None 4 4 25% Country Manager 11 6 3 2 38% 43% 29% Owner 10 2 3 5 13% 43% 71% Role at Partner 5 4 1 25% 14% Company VP 3 3 19% Associate 1 1 6% < 5 6 4 1 1 25% 14% 14% Years of 5 to 9 4 4 25% Overseas 10 to 14 6 2 3 1 13% 43% 14% Experience 15 to 19 6 2 2 2 13% 29% 29% 20 and > 8 4 1 3 25% 14% 43% < 40 3 2 1 13% 14% 40 to 49 11 6 2 3 38% 29% 43% Age 50 to 59 10 5 3 2 31% 43% 29% Over 60 6 3 1 2 19% 14% 29% Type of Small Private 21 10 6 7 63% 86% 100% Company Large Public 9 6 1 38% 14% Logistics 9 2 3 4 13% 43% 57% Consulting 5 3 1 1 19% 14% 14% Services 5 4 1 25% 14% Industry Manufacturing 4 3 1 19% 14% Development 4 2 1 1 13% 14% 14% Consumer Products 3 2 1 13% 14%
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