Political Competition and Corporate Bribery: Evidence from South Korea Yujin Jeong Kogod School of Business American University 4400 Massachusetts Avenue, NW Washington, DC 20016 Email: [email protected] Jordan I. Siegel Ross School of Business University of Michigan 701 Tappan Street Ann Arbor, Michigan 48109 E-mail: [email protected] This Version: November 14, 2019 *Please do not cite or circulate without permission. Abstract We study the relationship between political competition and corporate bribery as the channel through which companies may win and lose in economic competition. Using a novel dataset with a comprehensive coverage of high-level corruption in South Korea during two presidential administrations during which the country moved from dictatorship to multi-party democracy, we examine whether and how the degree of political competition affects companies’ bribery behavior and decisions on the types of money that they pay to political parties. In particular, we test whether corporate bribery increases or decreases with changes in political competition and whether bribery payments are converted to politically-connected charity contributions as political competition increases. Results show that corporate bribery is reduced while politically-connected charity contributions go up in economic size and frequency as political competition is increased. A logical way to interpret these results is that companies give donations to politically-connected charities out of self-interest and in order to influence political actors. We show that this combination of results is robust and consistent across alternative measures and specifications. Keywords: corporate bribery; political competition; charity contributions; institutions 1. Introduction Corporate bribery of public officials is an important phenomenon because it is costly to economic development, because it detracts from public confidence in the rule of law, and because it may distort who ends up being the winners and losers in economic competition (Shleifer and Vishny 1993, Mauro 1995, Bliss and Di Tella 1997, Ades and Di Tella 1999, Rose-Ackerman 1999). Because of a lack of theory and comprehensive data, corporate bribery is also one of the most understudied forms of non- market strategy (Baron 2012), in which firms use lobbying, contributions, and bribery to gain competitive advantage vis-à-vis governmental actors. We study the relationship between political competition and corporate bribery as the channel through which companies may win and lose in economic competition. In particular, we examine whether and how the degree of political competition at the national level affects companies’ decision to pay bribes, and whether a higher level of political competition leads companies to switch from bribery of government officials to charity contributions. Our empirical setting is South Korea during its time of transition to democracy. The unique bribery and charity data from South Korea allow us to examine this interesting substitution effect between bribes and charity contributions made by companies, as the degree of political competition changes. This study provides us useful insights into how companies utilize their political/non-market strategy in times of institutional transition. In the literature on political competition and corporate bribery, there are rival arguments that call for empirical testing. One argument focuses on the idea that under increased political competition, politicians will care more about attracting the additional dollar of campaign funds needed to put them over the top in a close contested election and will thus be willing to sell more policy outputs at a lower price. This in turn will result in more corporate bribery paid to enhance campaign accounts (Nyblade and Reed 2008). A rival argument states that under increased political competition, politicians are more vulnerable to public demands to end politically-granted industrial monopolies. As a result, politicians have less to offer companies in valuable policy outputs, and thus companies are willing to pay less in bribery. Thus, according to this argument, there would be less corporate bribery after increases in political competition (Kang 2002). A complementary argument is that under increased democracy, there 1 may also be increased rule of law. Thus, increased deterrence, monitoring, and punishment resulting from political competition may lead to decreases in corporate bribery (see, for example, Lederman, Loayza, and Soares 2005). Another distinct argument is for the null hypothesis of Fisman and Golden (2017: 173-179) that increased political competition has no impact on corruption. Their explicit and implicit argument is that the effects of compensation are counterbalanced and overwhelmed by effects of contemporaneous changes in economic development. We will test for their alternative view through the use of time fixed effects, which control for any contemporaneous changes in economic development. We seek to provide a novel empirical test of the rival theoretical predictions in the literature using South Korea as an empirical setting. Two former South Korean presidents, Chun Doo Hwan (Chun,1980- 1987) and Roh Tae Woo (Roh, 1988-1992), ruled over South Korea during the time period of 1980-1992. As a result of a democratic transition combined with an unexpected zeal by their own anointed successor to later prosecute them as a means of demonstrating his own democratic credentials, these two presidents’ internal accounting books were unexpectedly subjected to a parliamentary investigation and a court trial that led to the publication of their entire internal accounting records. We are able from this parliament- audited and court-audited data to know how much each South Korean business group (also called chaebol)1 gave in the form of bribes to Chun and Roh in each year during 1980-1992. We also know from the country’s parliamentary and media sources how much each business group made monetary contributions to key quasi foundations set up by Chun and his spouse during the 1981-1987 time period. Using this comprehensive database on high-level bribery in South Korea, we are able to uniquely test the rival theoretical predictions linking political competition to corporate bribery vs. charity donations. Next, Section 2 reviews the rival arguments in the theories of political competition and corporate bribery and discuss our testable hypotheses. Section 3 provides our empirical context where we discuss South Korea’s political transitions and describe the nature of corporate bribery and politically-connected 1 A chaebol is a family-controlled and diversified group of businesses and similar to those business groups that exist through most of the world outside of the U.S. and the UK. 2 charity donations in South Korea. Section 4 introduces our data, sample, variables and model specifications. Section 5 reports the results. Section 6 discusses the findings and concludes. 2. Rival Perspectives on Political Competition and Bribery One of the two rival perspectives in the literature proposes that increased political competition will lead to more bribes paid by companies to politicians. The main proposed logic comes from Nyblade and Reed (2008), who argued that the type of bribery that enables politicians to have the funds to increase their probability of retaining and increasing political power under a close election should increase with increased political competition. That is because, under competition, the politicians are more motivated to get that incremental money to raise their probability of edging past their opponent. The companies see that the politicians are thus more willing to sell them policy outputs in exchange for more bribes. As a result, the companies will pay larger bribes. Incidentally, Nyblade and Reed (2008) argue the logic that runs the other way for politicians seeking to line their own pockets, but in our South Korean context after 1987 when there was increased political competition (Ho 1996: 468-469), the case stories suggest that politicians were primarily concerned with increasing their party/faction’s probability of retaining and/or increasing political power. There are also two other related arguments that are complements to that of Nyblade and Reed (2008). A related argument states that with increased political competition there is typically a proliferation of new and additional veto points throughout the executive and legislative branches for policy to be passed and implemented. Each of these new and additional veto points may feel incentivized to ask for bribes from companies to remove their veto, and as a result the total amount of bribery payments may thus increase (Weyland 1998). A further related argument is that with increases in political competition, new politicians come into power who have little time to pass legislation and building long-term reputational capital with voters. As a result, these new politicians may well feel incentivized to compete on clientelistic relationships and possibly corruption to get elected and then re- elected in at least the first several years after an increase in political competition (McChesney 1987, 3 Shefter 1994, Kitschelt et al. 1999, Montinola and Jackman 2002, Keefer 2007, Keefer and Vlaicu 2008).2 As a result, in countries which are seeing increases in political competition for the first time, corporate bribery will be predicted to increase for the just-above-stated reason as well. Also, a further complementary argument