The effectiveness of laws against bribery abroad
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The effectiveness of laws against bribery abroad
Alvaro Cuervo-Cazurra Sonoco International Business Department, Moore School of Business, University of South Carolina, Columbia, USA Correspondence: A Cuervo-Cazurra, Sonoco International Business Department, Moore School of Business, University of South Carolina, 1705 College Street, Columbia, SC 29208, USA. Tel: þ 1 803 777 0314; Fax: þ 1 803 777 3609; E-mail: [email protected]
Abstract This paper analyzes the effectiveness of laws against bribery abroad in inducing foreign investors to reduce their investments in corrupt countries. The laws are designed to reduce the supply of bribes by foreign investors by increasing the costs of bribing abroad. Such increase in costs will make foreign investors more sensitive to corruption, and induce them to reduce their investments in corrupt countries. However, the paper argues that these laws need to be implemented and coordinated in multiple countries to become effective. Otherwise, investors in a country will have incentives to bypass them when competitors from other countries are not bound by similar legal constrains. The empirical analysis shows that investors from countries that implemented the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions of 1997 reduced their investments in corrupt countries. Investors from the US, which were bound by the Foreign Corrupt Practices Act of 1977, also reduced investments in corrupt countries, but only after the OECD Anti-Bribery Convention was in place. Journal of International Business Studies (2008) 39, 634–651. doi:10.1057/palgrave.jibs.8400372 Keywords: corruption; foreign direct investment; law; institutions
Received: 7 February 2006 Revised: 15 August 2007 Accepted: 31 August 2007 Online publication date: 21 February 2008
INTRODUCTION I analyze the effectiveness of laws against bribery abroad in inducing foreign investors to reduce their investments in corrupt countries. Corruption – the abuse of public power for private gain – is detrimental for the country (Bardhan, 1997; Elliott, 1997; Kaufmann, 1997; Rose-Ackerman, 1999; Svensson, 2005; Tanzi, 1998; Wei, 2000a). It acts like an irregular tax, increasing costs and uncertainty and distorting incentives to investment (Shleifer & Vishny, 1993). As a result, countries with high corruption show lower levels of economic growth (Mauro, 1995) and distorted government expenditure (Mauro, 1998). Hence reducing corruption is important for the development of the country. All countries have laws that punish bribery, to reduce the demand for bribes by politicians and civil servants. However, in many cases such legislation is not effective in countries with high corruption, because judges may be open to accept a bribe to alter the application of the anti-corruption law. Additionally, the government official demanding the bribe may be a politician with the power to alter the legislation or i
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