Arguments For and Against Bribery

1
Arguments For and Against Bribery

• Against
• Wrong
• Illegal
• Compromise personal beliefs
• Promotes government corruption
• Slippery slope
• Prohibits taking a stand for honesty, etc.
• Benefits recipient only
• Creates dependence on corruption
• Deceives stockholders

• For
• Necessary to do business
• Common practice
• Accepted practice
• Form of commission, tax, or compensation

2
Managerial Concerns

• Between 1995 and 2025, more than half of the
  worlds growth will be in countries that rank
  high in corruption (China, Indonesia, India)
• Executives (Harvard Study) state that corruption
  is the most important economic challenge!!
• 80 billion is spent annually to bribe public
  officials worldwide
• U.S. companies lost over 100 overseas contracts,
  worth 45 billion because of bribery, 1994-1996

3
Causes of Corruption

• Interdependence between economic and political
  actors
• Public officials having discretionary power over
  the distribution to the private sector (i.e.
  govt. contracts)
• Industry subsidies associated with more
  corruption
• Corruption exists at every level

4
Factors contributing to corruption (TI)

• Low public sector salaries
• Secrecy in the government
• Bad procurement practices
• Immunity of public officials

5
Types of Corruption

• Petty Corruption interaction with low level
  bureaucrats, taxes, regulations, licensing
• Grand Corruption high level officials,
  infrastructure projects, procurement of military
  equipment
• Influence Peddling campaign contributions

6
Types of Corruption
Private Actors
Non Elected Officials
Elected Officials and politicians
7
Dimensions of CorruptionAME, Doh, Rodriguez,
Uhlenbruck, Collins and Eden, August 2003

• Pervasiveness
• Payment expectations are predictable
• Standard payment to clear customs
• Firms can expect the services to be rendered
• Arbitrariness
• Governments trying to maximize their own bribe
  revenue
• Firms are uncertain who to pay and whether
  they will get any services

8
Countries Corruption Levels
9
Where does corruption occur?Transparency
Internationals Corruption Perception Index 2004

• Least Corrupt Countries
• Finland 6. Sweden
• New Zealand 7. Switzerland
• Denmark 8. Norway
• Iceland 9. Australia
• Singapore 10. Netherlands

10
Most Corrupt Countries

• 106 out of 146 countries scored less than 5 (10)
• Haiti Paraquay
• Bangladesh Azerbaijan
• Nigeria Turmenistan
• Myanmar Tajikistan
• Chad Indonesia

11
Changes in Corruption Levels

• Increases in Corruption
• Bahrain, Belize, Cyprus, Dominican Republic,
  Jamaica, Kuwait, Luxembourg, Mauritius, Oman,
  Poland, Saudi Arabia, Senegal, Trinidad, Tobago
• Decreases in Corruption
• Austria, Botswana, Czech Republic, El Salvador,
  France, Gambia, Germany, Jordan, Switzerland,
  Tanzania, Thailand, Uganda, United Arab Emirates,
  Uruguay

12
Bribe Payers Index (1999)

• Which companies in the following countries are
  most likely to bribe?
• Least likely Sweden, Australia, Austria and
  Canada
• (OECD Conventional ratified)
• Most Likely Italy, Taiwan, South Korea, and
  China (Only South Korea had ratified the OECD
  convention)

13
Bribe Payers Index -2002

• Least likely to bribe, Australia, Sweden,
  Switzerland, Austria, and Canada
• Widely seen as using bribes Russia, China,
  Taiwan, and South Korea
• High propensity to bribe Italy, Hong Kong,
  Malaysia, U.S., Japan, France, and Spain
• Construction and arms industries most susceptible
  to bribes

14
Industry Sectors Most Likely To Accept Bribes-
Demand Factors

• Public works and construction contracts
• Arms and defense industry
• Power (Energy and Petroleum)
• Industry mining
• Based on a survey of business executives and
  business professionals in emerging countries

15
Is Corruption Really A Problem?

• Wasted resources that are devoted to corrrupt
  activity
• Reallocation of resources to the rich and
  politically powerful
• Redistriction of administrative energy toward
  creating bureaucratic barriers
• Leads to a decrease in GDP growth, less foreign
  direct investment, income inequality, and
  misallocation of government resources

16
The Costs of CorruptionEconomist, 1999

• Countries with more corruption have less going
  into investment, less in education.
• In Uganda, of every dollar allocated to
  education, only 20 cents reached the schools
• In Albania, business pay a third of their
  potential profits.
• In Indonesia, payments add up to a fifth of
  operating costs.
• German businesses pay more than 3 billion to
  win contracts abroad.

17
Costs of Corruption

• Corrupt Activity
• Bureaucrat accpts speed money to issues licenses
• Organized crime controls and sets prices
• Tax collectors permit the under reporting of
  income
• (in exchange for a bribe)
• Government offiicials order expensive capital
  goods or overpay for public work projects
  (kickbacks)

• Economic Cost
• 3 to 10 premium above the licensing fee
• Goods sell at 15 to 20 premium
• Income tax revenues reduced by 50
• Goods and services priced 20 to 100 higher than
  necessary

18
The Bribe Fee List
19
Southeast Asias CorruptionEconomist, 2/21/04

• Most countries save Malaysia and Singapore rank
  in the bottom half of the Corruptions Perception
  Index
• Vietnam, 100 out of 133
• Indonesia, 122 out of 133
• Myanmar, 129 out of 133
• Lack of laws, personnel, and money to combat
  corruption

20
Southeast Asias Battle

• Lack of political will to combat corruption
• Have independent agencies, but often stack the
  appointments
• Prime Ministers of the Philippines, Thailand
  unwilling to take a tough stance
• Courts can undermine counter corruption cases
  (either too long, Philippines or for sale,
  Indonesia)

21
The Costs of BriberyLane Simpson, 1984

• May set a precedent and your company may be
  susceptible to future payoff demands.
• Payoffs become a standard operating procedure.
• May not address organizational problems of
  adapting to doing business in a developing
  country.
• Better to take the time to establish good
  relationships.

22
Strategic Impact of Corruption on Firms in India
(Collins, Uhlenbruck, 2004)

• Survey of 350 executives in India
• Executives have a negative perception of
  corruption
• They still actively engage in corruption
• Certain industries were less likely to engage in
  corruption (service)
• Found a positive relationship between executive
  level social capital and corruption

23
U.S. Foreign Corrupt Practices Act (1988)

• Unlawful to bribe foreign officials, foreign
  political parties, party officials or candidates
  to obtain or retain business.
• Applies to any individual firm, officer,
  director, employee, agent of the firm and any
  stockholder.
• Prohibits payments through intermediaries.
• Grease payments are allowed that expedite or
  secure routine governmental action (processing
  papers, providing police protection, providing
  phone service)

24
Bribes vs. Grease Payments

• Definitions
• Grease PaymentsRelatively small sums of money
  given for the purpose of getting minor officials
  to
• Do what they are supposed to be doing
• Do what they are supposed to be doing faster or
  sooner.
• Do what they are supposed to be doing better than
  they would otherwise.

• Examples
• Money given to minor officials (clerks,
  attendants, customs inspectors) for the purpose
  of expediting. This form of payment helps get
  goods or services through red tape or
  administrative bureaucracies.

25
Bribing

• Relatively large amounts of money given far the
  purpose of influencing officials to make
  decisions or take actions that they otherwise
  might not take. If the officials considered the
  merits of the situation only, they might take
  same other action.

• Money given, often to high-ranking officials.
  Purpose is often to get these persons to purchase
  goods or services from the bribing firm. May also
  be users to avoid taxes, forestall unfavorable
  government intervention, secure favorable
  treatment

26
Associated Payments

• Criminal penalties were increased to 2 million
  for companies.
• 100,000 for individuals.
• Maximum imprisonment is five years.
• U.S. companies lost 15 billion in orders to
  firms that countries allow bribes. (U.S. Commerce
  Department)

27
Response by U.S. Companies

• Some companies continue to bribe, Lockheed Martin
  paid 1.5 million to an Egyptian government
  official.
• Other companies attempt to establish goodwill.
• IBM donated 25 million in hardware to Chinese
  universities.

28
Response by U.S. Companies

• Companies may decide not to do business in a
  country where they must bribe.
• Unilever pulled out of Bulgaria rather than pay
  bribes.
• Shell is linking employees pay to their ability
  to carry out the companys code.

29
International Policy

• A bribery convention was signed in 1999 by all 29
  members of OECD and five non members.
• It is a crime to bribe any foreign official to
  retain or win business.
• Countries must help each other prosecute cases.
• OECD has initiated a two phase monitoring process

30
Making the Right DecisionDeresky, 2003

• Consult laws of the home and host countries
• Consult international law, the International
  Codes of Conduct for MNEs, OECD
• Consult the companys code of ethics
• Consult superiors
• Rely on your own moral code of ethics

31
Principles for Countering Bribery

• Developed by TI, Private Sector, NGOs, and trade
  unions
• The enterprise should prohibit bribery in any
  form whether direct or indirect
• The enterprise should commit to implementation of
  a program to counter bribery

32
Scope of the Program

• Address the most prevalent forms of bribery
• Bribery Prohibit the offer, gift, or acceptance
  of a bribe in any form, including kickbacks
• Political Contributions Shouldnt use campaign
  contributions to obtain a business advantage
• Charitable Contributions Cant be used as a
  cover up for bribery
• Gifts Prohibit gifts, hospitality, or expenses
  whenever they may affect business outcomes

33
Coping Strategies

• Avoidance
• Benefits Bypasses the problem
• Problems Forego opportunities
• When Pervasive and Arbitrary Corruption (levels
  of FDI fall)

34
Additional Strategies

• Adjusting The Entry Mode
• When Pervasive and Arbitrary Corruption
• Benefits Allows firms to maintain participation
  in the market while avoiding exposure to
  corruption
• Dont have to forgo the opportunity
• Costs Denies some advantages of other entry
  mode options
• Denies the host country some benefits

35
Adjusting the entry model

• Pervasive Corruption
• As pervasive corruption increases, firms are
  more likely to choose a mixed joint venture
• Less likely to have international jvs only!
• Arbitrariness Corruption
• As it increases, more likely to have
  international only joint ventures
• Projects are transferred when it is completed!

36
Codes of Conduct

• Used to fight pervasive and arbitrary corruption
• Could incorporate major MNEs around the world
• Downside, lack rigor, local firms unlikely to
  sign on
• Examples Shells General Business Principles

37
Training, Development, and Public Education

• When Pervasive, but less arbitrary corruption
• Benefits Regional focused programs could make
  progress easier
• Makes policies clear for employees
• For government sponsored programs
• Costs may lack teeth, targeted toward one
  company, uneven application across subsidiaries

38
Social Contributions/Public Donations

• When Pervasive Corruption
• Benefits Provides needed services to the host
  country without breaking the law
• Costs May be difficult to determine when the
  law gets crossed
• May raise expectations of continued and rising
  payments

39
Laws and Agreements

• When Arbitrary and Pervasive Corruption
• Benefits FCPA includes strict rules and
  penalties
• OECD relatively comprehensive agreement
• Some countries are adopting OECD principles
• Costs FCPA may disadvantage U.S. firms
• Lack of enforcement in developing countries

40
Making Ethical Choices

• Consult the laws of both the host and home
  country (dont violate the laws)
• Consult the International Codes of Conduct for
  MNEs
• If legal consultation does not provide you with a
  clear answer, consult the companys code of
  ethics
• The company should provide guidelines!!!