The MNC as an agent of change for host-country institutions: FDI and corruption
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The MNC as an agent of change for host-country institutions: FDI and corruption Chuck CY Kwok1 and Solomon Tadesse2 1
Moore School of Business, University of South Carolina, Columbia, SC, USA; 2Stephen M Ross School of Business, University of Michigan, Ann Arbor, MI, USA Correspondence: S Tadesse, Stephen M Ross School of Business, University of Michigan, 701 Tappan Street, Ann Arbor, MI 48109-1234, USA. Tel: þ 1 734 763 5392; Fax: þ 1 734 936 0282; E-mail: [email protected]
Abstract Most empirical research examines how the institutional environment of corruption shapes the behavior of multinational corporations (MNCs). In this study, we would like to highlight the other side of the picture: how the presence of MNCs may shape the institutional environment of corruption over time. We propose three avenues through which the MNCs may have an impact on its host institutions: regulatory pressure effect, demonstration effect, and professionalization effect. Based on extensive data on foreign direct investment and corruption for a large sample of countries over the last 30 years, the empirical results are generally consistent with our hypothesis. Such findings provide a glimmer of hope for the future of the host country where corruption is prevalent. Journal of International Business Studies (2006) 37, 767–785. doi:10.1057/palgrave.jibs.8400228 Keywords: foreign direct investment; corruption
Received: 22 August 2005 Revised: 25 February 2006 Accepted: 28 February 2006 Online publication date: 7 September 2006
Introduction With the expansion of international business activities, the study of corruption and its effects has received increased attention recently. Multinational corporations (MNCs) are careful in choosing host countries for their foreign subsidiaries, because they are concerned that pervasive corruption could increase their operational costs and risks. So are also multinational banks, as corruption could drain the investment funds of a country, hampering its economic growth and debt service capacity. International development agencies are concerned that financial aid meant to help economic development and the poor may be squandered by corrupt government officials. Following Macrae (1982), in this study we define corruption as an arrangement that involves an exchange between two parties (the ‘demander’ and the ‘supplier’) which: (1) has an influence on the allocation of resources either immediately or in the future; and (2) involves the use or abuse of public or collective responsibility for private ends. The harmful effects of corruption have been extensively documented in the literature (e.g., Rose-Ackerman, 1975; Mauro, 1995, 1997). Corrupt payments amount to a significant percentage of gross national product, because the rents extracted by a corrupt system get built into the cost structure of organizations. Corruption distorts efficient resource allocation. Corruption rewards unproductive behavior by channeling unm
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