Asia Pacific Journal of Management

, Volume 24, Issue 1, pp 97–114

Corruption in Asia: Pervasiveness and arbitrariness

Authors

    • School of ManagementThe University of Texas at Dallas
  • Kyeungrae Kenny Oh
    • School of ManagementThe University of Texas at Dallas
Reviews

DOI: 10.1007/s10490-006-9027-y

Cite this article as:
Lee, S. & Oh, K.K. Asia Pacific J Manage (2007) 24: 97. doi:10.1007/s10490-006-9027-y

Abstract

How does one understand the differences and similarities of corruption among various Asian countries? We use a recent framework developed by Rodriguez, Uhlenbruck, and Eden (2005) to suggest that corruption has to be examined from two different dimensions: pervasiveness and arbitrariness. Using this framework, we ask why some Asian countries are able to achieve high levels of economic growth in the midst of high level corruption while other countries suffer from economic stagnation. We specifically suggest that more firms would bribe when pervasiveness is high, while fewer firms would bribe when arbitrariness is high. We also look into the implications on foreign direct investment.

Keywords

CorruptionPervasivenessArbitrariness

The 1997 Asian economic crisis was a shock to many individuals, not only because of the economic collapse of many affected countries in Asia, but also because of the puzzle it provoked: How the amazing pre-1997 economic development was possible in some countries with rampant corruption. Considering that it is a common belief that economic growth cannot be based on corruption (Mauro, 1995; Rose-Ackerman, 1999), it is natural to be puzzled. Not all, but many countries in Asia were enjoying their economic prosperity on corruption, which was widely revealed to the outside world only after the 1997 economic crisis.

Corruption, however, is not new. Like illness, corruption has always been with us (Anand, Ashforth, & Joshi, 2004; Husted, 1999; Klitgaard, 1988; Rodriguez et al., 2005). Past research finds that corruption is undesirable and costly for the society (Klitgaard, 1988; Mauro, 1995; Mbaku, 2000; Rose-Ackerman, 1999). For example, Brunetti, Kisunko, and Weder (1998) show that credibility of the rules is linked to economic growth. For individuals and firms, however, engaging in corrupt behaviors may bring immediate benefits (Boddewyn, 1988; Lenway, Morck, & Yeung, 1996; Ring, Lenway, & Govekar, 1990). Reportedly, companies that pay bribes are four times more likely to get the deals worldwide than those firms that do not bribe (Management Services, 1996). Therefore, it is not surprising that we witness an increasing interest in research on corruption in management and economics (Luo, 2002; Reinikka & Svensson, 2005; Robertson & Watson, 2004; Rodriguez et al., 2005).

Past research finds that in many Asian countries relationship or network has been emphasized as one of the efficient ways of doing business (Peng & Zhou, 2005). For example, Xin and Pearce (1996) show that networking (called guanxi – relationship supported by reciprocal obligations – in China) capabilities can be a source of competitive advantage when formal institutions are not well developed. Due to the importance of networking in many countries in doing business, the US government, even under the Foreign Corrupt Practice Act (FCPA) (1977), allowed grease money (expediting payments) for US firms operating in foreign countries. While networking can be an important source of competitive advantage, in many Asian countries, some of the networking was done on the basis of under-the-table corruption transactions (Fisman, 2001). In this sense, not all, but some of what has been seen as a network advantage can also be seen as a corrupt behavior (see Figure 1).
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Figure 1

Corruption and networking

While it is not rare to find past studies on corruption, there is ample room for further research. Especially, considering that the 1997 Asian economic crisis highlights the perils of corruption and “crony capitalism,” it becomes more important to study corruption in Asia (see Appendix 1 for a list of relevant studies). In addition, while it is quite well accepted that corruption is undesirable and costly for the society (Klitgaard, 1988; Mauro, 1995; Rose-Ackerman, 1999), we find that many Asian countries with quite high levels of corruption show high levels of economic development as well, which warrants more scrutiny (Campos, Lien, & Pradhan, 1999; Rock & Bonnett, 2004; Wedeman, 2002).

To fill this gap, in this paper, we examine the differences and similarities of corruption among Asian countries. Specifically, we use a recent framework developed by Rodriguez et al. (2005) to suggest that corruption has to be examined from two different dimensions: pervasiveness and arbitrariness. Using this framework, we ask: How does one understand the differences and similarities of corruption among various Asian countries? Why are some Asian countries able to achieve high economic growth in the midst of high level corruption, while other countries suffer from economic stagnation? How would foreign direct investment (FDI) be affected by corruption? We also use some country examples to illustrate strategies on how to combat corruption. With an increasing interest in various management research topics on Asia (Meyer, 2006; Peng & Delios, 2006), we believe that it is timely to look into corruption in Asia.

What is corruption?

Traditionally scholars viewed corruption as public officials’ discretionary power over the resources to the private sector (e.g., Rose-Ackerman, 1978, 1999). Following past research, here we define corruption broadly as the abuse or misuse of positions or resources of public officials for private gains usually in the form of bribery. While corrupt behavior can occur without bribery (e.g., such as nepotism), we focus on the bribery to distinctly differentiate from network advantages that can come without bribery.

Two dimensions of corruption: Pervasiveness and arbitrariness

Past research shows that the most pronounced effects of corruption comes from the uncertainty in evaluating the propensity of gaining preferential treatments that were promised at the transaction of the briberies (Campos et al., 1999; Shleifer & Vishny, 1993; Uhlenbruck, Rodruguez, Doh, & Eden, 2006; Wei, 1997). Based on this notion, Rodriguez et al. (2005) distinguish between the two dimensions of corruption. They argue that pervasiveness of corruption is the average likelihood of encountering bribery request in the business interactions. In other words, pervasiveness gauges how prevalent and institutionalized the bribery in a society an individual or a firm manages. Therefore, the more pervasive the corruption in a society, the more visible the bribery is. The more visible the bribery, the easier it would be for the firms to decide if they would want to be active in bribing. When one observes that every firm pays bribes, one can be quite certain that bribing would be a wise way of doing business in that environment. On the other hand, when bribery is not rampant, one could feel safe in engaging in business transactions without bribing the government officials who may have some influence on one’s business.

While corruption is prevalent everywhere, the effectiveness with which bribery delivers the agreed upon deals is not the same everywhere (Rodriguez et al., 2005; Transparency International, 2001). This is especially the case when we examine the level of uncertainty associated with corruption – arbitrariness of corruption (Wei, 1997). Arbitrariness of corruption is the degree of ambiguity associated with the likelihood of gaining agreed upon favorable treatments in corrupt transactions (Rodriguez et al., 2005). Although it is ambiguous if the favorable treatment is going to be gained or not, it is less transparent if it is worth bribing in business transactions. The party with discretionary power that is rendering favorable treatment in exchange for the bribery may capriciously change the rule of the game in business transactions. For example, in the process of the deal, government officials may come back and ask for more bribery than it is originally agreed upon. In addition, when the discretionary power is scattered to multiple people or government agencies, it is uncertain to whom to pay bribes, which increases the uncertainty and cost of bribing activities. In other words, “in such a setting, firms are uncertain of whom to pay, what to pay, and whether the payments will result in the delivery of the promised goods or services (Doh, Rodriguez, Uhlenbruck, Collins, & Eden, 2003: 18).

The lack of coordination among governmental officials makes it harder for bribe payers to ascertain if the promised service would be delivered. This is why Shleifer and Vishny (1993) suggest that an organized corruption regime may be more extractive in asking for more bribes, but at the same time may be less harmful because it is more predictable. An organization with the discretionary power concentrated at the top may not vary agreed upon deals, which lessens the level of uncertainty in gaining favorable treatments in exchange for bribery. In this kind of environment, even though bribery is quite rampant, it is predictable. In a way, it is like an onerous tax that firms must pay and thus firms can budget for this onerous tax and plan ahead (Doh et al., 2003; Shleifer & Vishny, 1993). In addition, firms can expect to receive the service that is promised by a government official as far as this tax-like bribe is paid. Therefore, the predictability attached to high pervasiveness enables firms to manage in a relatively predictable environment (Rodriguez et al., 2005). Therefore, we can see that arbitrariness – the uncertainty attached to corruption – reduces a firm’s ability to estimate the cost of engaging in bribery. In the next section, we specifically examine Asian countries using pervasiveness and arbitrariness of corruption as the basis for studying differences in corruption in Asian countries.

Two dimensions of corruption in Asia

While corruption is everywhere, it is interesting to examine Asia because in some countries in Asia, contrary to conventional wisdom, economic development was in place hand in hand with a high level of corruption. This is the reason why Campos et al. (1999) argue that Asia is puzzling. Here we show variances in corruption in Asian countries and show how some countries may sustain a high level of economic development with a high level of corruption. While countries such as Singapore are famous for not tolerating corruption, India is known as a country with quite a high level of corruption. At the same time, countries such as Korea and Indonesia are puzzling in that in the midst of corruption, they could move on with economic development (see Appendix 2).

In Figure 2, using the two dimensions of pervasiveness and arbitrariness,1 we classify countries in four different categories. Countries that are in Cell 1 are high in pervasiveness, but low in arbitrariness (e.g., Indonesia, South Korea, and China). In Cell 2, countries are low in both pervasiveness and arbitrariness (e.g., Hong Kong, Japan, and Singapore). In Cell 3, countries are high in both pervasiveness and arbitrariness (e.g., India). Countries that are in Cell 4 are low in pervasiveness, but high in arbitrariness (e.g., Malaysia).
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Figure 2

Pervasiveness and arbitrariness of corruption in Asian countries

When countries are high in pervasiveness, but low in arbitrariness (Cell 1 in Figure 2), firms can plan ahead and expect quite a high level of certainty in receiving the service in exchange of bribery. For countries falling in Cell 1, as mentioned above, even while corruption is prevalent, if the level of arbitrariness attached to corruption is low it is quite possible to sustain economic prosperity. For example, Indonesia and the Philippines are notorious for embezzlement by the former presidents—Suharto and Marcos, respectively. Transparency International (2004) shows that alleged embezzlement of the two former presidents may exceed US $10 billion and US $35 billion, respectively, during their presidency. However, since the corruption was centralized, the percentages expected to be paid to get favorable treatments were clear (e.g., Suharto was famous as “Mr. Ten Percent” in Indonesia).

In other words, in Indonesia and the Philippines, the level of arbitrariness of corruption was relatively low, which decreased the uncertainty involved in bribing activities. Therefore, as long as the central figures in Indonesia and the Philippines were in power, it was evident that going through them would guarantee business. This is why Fisman (2001) finds that politically connected firms had bigger trouble in their stock prices at the news that Suharto was sick in his late days. This predictability provided individuals and firms to bribe with clear anticipation of receiving the economic benefits of doing it.

China also demonstrates a similar case. Currently, China’s corruption appears to be associated with a strong local government influence on businesses such as substantial freedom to maneuver resources and rights in the district, which puts local government officials in better positions to ask for bribes (Gong, 2002). In contrast to such a high pervasiveness of corruption, the extent of arbitrariness is relatively low. For example, Wang and Zhang (1999) report that “one can buy an official position at the section level for 10,000 RMB, while spending 50,000 RMB would make him the bureau director in Tai An, Shandong Province.” Thus, we argue:

Proposition 1

When pervasiveness is high and arbitrariness is low, more firms will pay bribes, but will receive the service agreed upon at the time of bribery.

As seen in Cell 2 in Figure 2, firms falling in this cell manage in an environment where both pervasiveness and arbitrariness are low. For example, Singapore is an exemplary country in this regard. Firms in this environment feel no need to worry much about bribing since governmental officials do not expect firms to pay bribes. In addition, it is not uncertain if a firm would be getting the service promised even when bribery situation takes place, which is unlikely to happen in the first place. This is why Singapore is famous for maintaining “its reputation as a ‘corrupt-free’ haven in a region in which shady practices are all too common” (Straits Times, 1996: 3). Hong Kong and Japan also share this cell with Singapore (Svensson, 2003).

Proposition 2

When both pervasiveness and arbitrariness are low, fewer firms will pay bribes and will receive the service agreed upon even when bribery is required.

Some firms, however, have to manage in an environment where both pervasiveness and arbitrariness are high. Cell 3 in Figure 2 represents this kind of hostile environment. When both pervasiveness and arbitrariness are high, it would be very hard for firms not to engage in bribery actions. However, at the same time, because arbitrariness is high even though firms would pay big bribery, it would be unreasonable to expect certainty in the delivery of the service promised at the time of bribery. In other words, this is a kind of country where bribing is very common, but at the same time, it is unclear if bribery would work in favor of the bribers. However, since everybody does it, not bribing cannot be an option. Countries such as India are characterized with high pervasiveness and high arbitrariness in corruption (Rodriguez et al., 2005). A study in 2005 conducted by Transparency International India highlights that three-fourths of Indian citizens think that the level of corruption in public services has increased in the last year (2004–2005) and 62% of citizens have the first hand experience of paying bribes or using contacts to get jobs done in public offices (Transparency International India, 2005).2 It clearly shows how pervasive the problem of corruption is in the day-to-day life of common citizens in India.

In addition to such a high pervasiveness of corruption, recent research (Bertrand, Djankov, Hanna, & Mullainathan, 2006) delineates the arbitrariness of corruption in India is high as well. One example is the need to bribe to get driving licenses in India. People paid on average more than twice the official fees to obtain their driving licenses. The study shows that learning how to drive is not the best way to get a license, especially if one is in a hurry (Djankov, La Porta, Lopez-De-Silanes, & Shleifer, 2002; Peng, 2006). Participants who are more willing to pay bribes for licenses are more likely to obtain their license and also obtain it faster. The study suggests that bureaucrats create red-tape for private gains (Shleifer & Vishny, 1993; Svensson, 2003) and utilize the driving test, not to screen unsafe drivers, but to arbitrarily fail some people. That is why about 75% of the participants eventually bribed intermediary governmental officials to obtain a license. This involvement of an intermediary makes corrupt transactions more complex and arbitrary to get private gains pursued in India. Thus, we argue:

Proposition 3

When both pervasiveness and arbitrariness are high, more firms will pay bribes and will be unable to expect to receive the service agreed upon at the time of bribery.

Some other firms may have to manage in an environment where while pervasiveness is low, arbitrariness is high, as those falling in Cell 4 of Figure 2. In this kind of environment, firms may not see bribery as a required onerous tax they have to pay since pervasiveness is low. However, when they see a situation where they would have to pay bribes, it would be hard to expect that governmental officials would deliver the service that is agreed upon at the time of bribery. Malaysia is a good example here. Malaysia is a little different from other countries in other cells in that while corruption is comparatively less prevalent, it is quite high in arbitrariness. This is because under certain circumstances, it is unclear who to team up with to secure political favors. Thanks to the relatively better developed institutions in Malaysia compared to Indonesia and the Philippines, pervasiveness is low. Arbitrariness, however, is quite high. In other words, while bribing is not as common as other countries, Malaysia is a country that once an individual or a firm decides to pay bribes, it is not a clear call to whom and how to bribe. For example, Johnson and Mitton (2003) show that while Prime Minister Mahathir Mohamad was on top, Daim Zainudin, a former finance minister, was wielding political power over the firms as well. In addition, after the Asian economic crisis in 1997, Anwar Ibrahim, who was only second to Mahathir in political power, became a political rival to Daim.3 Therefore, it was rather challenging to decide whom to go after and it was uncertain if the favorable treatment would be coming forth to bribery in Malaysia. Thus, we argue:

Proposition 4

When pervasiveness is low, but arbitrariness is high, fewer firms will pay bribes, but will be unable to expect to receive the service agreed upon at the time of bribery.

While corruption affects local firms, it can also be important for foreign firms that are intended to or already invested in a country. In this regard, we examine how the two dimensions of corruption may affect FDI into the countries with various levels of pervasiveness and arbitrariness.

The role of corruption in FDI

Past research laments that research on “the impact of corruption on foreign investment has received limited attention” (Doh et al., 2003: 114). This is a legitimate call because corruption not only affects domestic firms, but may also affects foreign firms that are intended to enter the market or those foreign firms that are already managing in that country. Since foreign firms are less familiar with the local environment, foreign firms may have a harder time in dealing with a corrupt environment especially when it is hard to predict to whom and how much to pay. To fill the gap, here we examine the effect of corruption on FDI in Asia.

Corruption not only dampens economic development, but also negatively impacts FDI inflows. For example, Wei (2000) shows that an increase of the corruption level from that of Singapore to that of Mexico would have the same effect of increasing the tax for 50% in decreasing inbound FDIs. The secretive nature of corruption makes it harder for foreign subsidiaries to grasp to whom and how much to bribe (Shleifer & Vishny, 1993). When it is a norm in a country to bribe, it is rather clear to whom and how much to bribe. In other words, when pervasiveness of corruption is high, it is rather clear for foreign firms as well that it would be better off to bribe. In this kind of high pervasiveness corruption environment, foreign subsidiaries are clearly advised to conform to local rules of bribery routines.

On the other hand, when it is unclear if engaging in corruption would deliver the promised favorable treatment, it is not likely that the firms would easily decide to bribe (Rodriguez et al., 2005). This is particularly so for foreign subsidiaries because they inherently suffer from liability of foreignness (Zaheer, 1995). The secrecy attached to bribery makes it much harder for foreign subsidiaries to understand if the bribery would bring the benefits that were promised at the time of bribery exchanges. In other words, when it is uncertain if the bribery is going to work favorably, foreign subsidiaries may suffer more than local firms from it.

In Asia, while countries such as China, Indonesia, Thailand, and Vietnam are quite high in the level of corruption, they also are high in the level of inbound FDI (Campos et al., 1999; Wei, 2000). For example, the FDI inflow-to-GDP ratio of China has been among the highest among developing countries. This may be because of the low arbitrariness of corruption even when the level of pervasiveness of corruption is high. For example, the past president of Indonesia, Suharto, is well known as “Mr. Ten Percent.” Since it is clear that paying 10% of the deal would secure the deal in Indonesia, it was relatively easy for foreign firms to compete with local firms without being discriminated once they pay the agreed upon 10%. Due to this 10% rule, Indonesia could preserve steady economic growth and large FDI inflows. Maybe this is why now, after the step down of Suharto, some Indonesians think back and say that it was, “in its understated way, a success” (Economist, 2006: 14). As Cell 1 in Figure 2 shows, while the pervasiveness of corruption in Indonesia is about four times higher compared to that of Singapore, its arbitrariness of corruption is at the similar level of that of Singapore. Thus, we propose:

Proposition 5

When pervasiveness is high, but arbitrariness is low, more inbound FDI will happen. In addition, foreign firms will feel less disadvantaged compared to local firms because it is rather certain that the bribery will deliver the service promised at the time of bribery.

On the other hand, foreign firms investing in countries such as Singapore or Hong Kong, where both arbitrariness and pervasiveness are low (Cell 2), would be less reluctant to invest in these countries. This is because foreign firms observe less need to know about who and how to bribe. In addition, without this knowledge, foreign firms would not be in a disadvantageous position since it is rare to find instances that require firms to bribe and even when they see the need to bribe, it would be reasonably certain that they would be getting the service promised at the time of bribery. Therefore, we argue:

Proposition 6

When both pervasiveness and arbitrariness are low, more inbound FDI will happen. In addition, foreign firms will feel less disadvantaged compared to local firms because it is less likely to have to pay bribes and even when it is required to bribe, it is predictable that the service will be delivered.

On the other hand, when foreign firms intend to invest in an environment where both pervasiveness and arbitrariness are high (Cell 3), they tend to confront a huge disadvantage compared to local firms. This is because firms would have to pay an additional onerous tax that they may not have to pay in home countries and even when they pay bribes, they would have less information on who and how to pay. For example, countries such as India have a hard time attracting FDI given the highly arbitrary environment. Coca-Cola’s exit from India in 1977 after clashes with the government typically shows that changing the rules by host governments would critically affect the flows of foreign direct investments by multinational enterprises. In addition to the enactment of India’s Foreign Exchange Regulation Act (FERA) in 1973, which restricts foreign equity ownership to 40%, the unexpected vicissitudes of politics (i.e., sudden change to new government in 1977) exacerbated Coca-Cola’s strategic options for investments (Encarnation & Vachani, 1985).

However, since India’s reform to market system in 1991, FDI inflows to India have been on the rise. Coca-Cola returned in 1993 after India reopened its door to foreign firms. Although corruption is still prevalent, India has dynamically improved its system, which led to a 30% rise in FDI inflows in the 2000s (UNCTAD, 2005). At the same time, however, World Investment Report (2005) still shows that India still ranks near the bottom in 2002 in terms of trans-nationality index of host economies (Bjornskov & Paldam, 2005). More recently, Coca-Cola India is again charged for its drinks containing pesticide (Business Week, 2006). Therefore:

Proposition 7

When both pervasiveness and arbitrariness are high, less inbound FDI will happen. In addition, foreign firms will feel more disadvantaged compared to local firms because it is more likely to have to pay bribes and when it is required to bribe, it is unpredictable if the service will be delivered.

There are also foreign firms that would look into opportunities in a market where pervasiveness is low and arbitrariness is high (Cell 4). For example, countries such as Malaysia fall into this cell. In this kind of environment, foreign firms would have a hard time finding to whom and how to bribe since local firms would have better knowledge when it comes to who and how to bribe. Since pervasiveness is low, foreign firms would not feel the pressure to bribe in this environment. Arbitrariness being high, however, when firms see a situation where they will have to bribe to get business, foreign firms would be in a disadvantaged position compared to local firms.

Proposition 8

When pervasiveness is low but arbitrariness is high, less inbound FDI will happen. Foreign firms will feel more disadvantaged compared to local firms because, even though bribery is prevalent, it is more likely that it will be unpredictable if the service will be delivered when bribery is needed.

In addition, in FDI, recently scholars have shown that not only is the level of corruption in host countries important, the difference in the level of corruption between the home and host countries is also important. For example, Oh and Lee (2006) show that when the difference of the level of corruption between the home and host countries are small, more FDI flows in. This supports the findings of Delios and Henisz (2003) that the Japanese firms that have more experience in dealing with corrupt governments are more efficient in managing in other Asian countries. This is why Habib and Zurawicki (2002: 295) argue that “acquiring skills in managing corruption helps develop a certain competitive advantage.” In this sense, it is understandable that the United States is not the number one source country of FDI inflows in China but rather is in fourth place after Hong Kong, Taiwan, and Japan (Zhang, 2002). Therefore, US firms may be disadvantaged when managing in a country such as China. On the other hand, the United States is the dominant player in FDI inflows into Japan -- over 50% for many years (RECOF, 2005).

Combating corruption

Hits and misses

If you want to buy a Sherman tank, a Red Cross blanket, or simply speed up the installation of a telephone, there is probably no easier place in the world in which to do just that than in Asia—if you are willing to part with some cash, that is. With pathetically few exceptions, the countries in this region are so riddled with corruption that the paying of “tea money” has become almost a way of life (Far Eastern Economic Review, 1974, 3).

4

This is how Westerners viewed Asia in the 1970s. Did anything change? Many things have changed including institutional development, democratization, and corporate governance reform after the 1997 Asian crisis (Ahlstrom & Bruton, 2004; Carney, 2004). Combating corruption is not an exception.

One of the persistent questions in corruption research is how the level of corruption can be reduced (Svensson, 2003). Practically, although there has been diverse efforts and policies administered, we have no clear evidence of decreasing tendency in corruption level (Svensson, 2003). As displayed in the Corruption Perception Index (Appendix 2), the level of corruption has been relatively stable in Asian countries for the past 10 years (Bjornskov & Paldam, 2005; Transparency International, 1995 through 2005), which shows that combating corruption is not an easy task.

The first aspect we take a look at is the governmental effort in centralizing anticorruption agencies. Quah (2002) shows Mongolia, even though it has an anti-corruption law, does not have any independent anti-corruption agencies. It is not surprising that in its 4 years of the establishment of the anti-corruption laws, no public officers were convicted of corruption in Mongolia. Countries such as India and the Philippines have many anti-corruption agencies, but none of them worked efficiently. For example, in India, numerous agencies act as cover-up operations for the misdeeds of the ministers. Therefore, it is not surprising that Gill (1998: 237) laments that “this elaborated and multi-layered apparatus to control administrative corruption has hardly made a dent on the situation.” Only 15% of the corruption cases are followed with official punitive actions in India (Ahmad & Brookins, 2004).5 The situation is not much different in the Philippines. Thirteen different anti-corruption agencies and seven anti-corruption laws were in place, but none of them were effective in dealing with corruption in the Philippines (Economist, 2004). Rather, every time new presidents were elected, new agencies were created while others were abolished (Quah, 1982). Overall, it is not surprising that the Philippines and India rank 88th and 117th, respectively, in Transparency International India’s 2005 Corruption Perception Index (CPI).

On the other hand, the effort of Singapore and Hong Kong governments is considered most effective in dealing with corruption (Svensson, 2003). Both countries maintain only one strongly independent agency that is not tampered with by politicians in power. This shows that rather than establishing multiple anti-corruption agencies, keeping one strong and independent anti-corruption agency may work better in curbing corruption. For example, while many other countries with similar agencies used anti-corruption agencies as an instrument to suppress political opponents, Hong Kong created legal precedents of “guilty until proven innocent” (Klitgaard, 1988; UNDP, 1997). In other words, once prosecuted, one individual would be treated as guilty until he/she proved to be innocent.

Recently, more Asian countries, realizing that corruption hampers the soundness of the economy, are making stronger efforts in combating corruption. For example, in 2002, Vietnam arrested more than 100 government officials and later suspended about 50 of them, which had never happened before (Economist, 2002a, b). Thailand also recently established an independent national counter-corruption commission to combat corruption (Economist, 2002a, b). Uncovering the corruption of Thailand’s prime minister, Thaksin Shinawatra, was one of the most remarkable accomplishments of the commission.6

International organizations also join the corruption-buster actions. For example, recently the World Bank has declared that the agency will link providing economic subsidies with the effort of the local governments in combating corruption (Washington Post, 2006). When Indian politicians were said to have their hands in the health funds, the World Bank blocked the loan. The World Bank also cancelled 14 road contracts in Bangladesh when corruption in the bidding process was found.

Furthermore, regional and international efforts also have been organized to combat corruption (Wescott, 2003). For instance, the OECD Convention against the Bribery of Foreign Public Officials came into place in 1998, making bribery a criminal offense by prohibiting bribes from being considered business expenses and tax deductible (Pacini, Swingen, & Rogers, 2002; Sanyal & Samanta, 2002). In the same direction, the Asia-Pacific Forum on Combating Corruption was launched in 1999 with partnerships with many Asia-Pacific governments, businesses, media, nongovernment organizations (NGOs), and international organizations. In 2001, a number of forum members signed the anti-corruption action plan for Asia-Pacific. The United Nations Development Program also chartered the Program for Accountability and Transparency (PACT) to create an environment for good governance (Quah, 2002). Along with the globalization of corruption, the various regional and international organizations concerned with curbing corruption have been emerged.

Learning from Hong Kong and Singapore

While many anti-corruption efforts in various Asian countries are ineffective, the cases of Singapore and Hong Kong shed an insightful light on the rocky road of combating corruption in Asia. What makes Hong Kong and Singapore different while corruption is quite ubiquitous in other countries?

In both Hong Kong and Singapore, the top political leaders consistently committed themselves to fighting corruption (Quah, 1995, 2002; Svensson, 2003). Most Asian countries experienced colonial periods and thus they were in the state of vacuum in property rights, new capitalist classes, and institutions when the colonial times ended. Therefore, the governments took power to formulate rules of allocation and to distribute rights and resources, which left the general public rather helpless (Khan, 1998). Along with such power imbalance, the great gap between the supply of the resources and the demand for access to these resources created substantial incentives for governmental officials to be corrupt and thus provided rooms for a deeply rooted connection between the states and businesses.

In such a setting, the strong commitment of the top political leaders would be an indispensable factor for the success in combating corruption. Like other Asian countries, Singapore suffered from widespread corruption until 1960, when a comprehensive anti-corruption law was introduced with the enactment of the Prevention of Corruption Act (POCA) and the Corrupt Practices Investigation Bureau (CPIB) was strengthened. During the British colonial period and the Japanese occupation, corruption was a way of life and even during the post-war period graft was rife in the Singapore government (Quah, 1999). Later, however, Peoples Action Party (PAP), the ruling party, sincerely dedicated itself to eradicating corruption and concentrated its efforts on reducing the opportunities and incentives for potential corruption. This was done by severely punishing corrupt behavior when caught and keeping government officials’ salary parallel with that of private sectors.

Similarly, Hong Kong benchmarked itself against Singapore and launched an independent and powerful anti-corruption agency, the Independent Commission Against Corruption (ICAC), in 1974. In the late 1950s and 1960s, corruption was an open secret and a way of life in Hong Kong. Like Singapore, the top leaders in the Hong Kong government also expressed firm commitment to curbing corruption and backed up this effort with appropriate resources along with a proper empowerment of authority. In both city-states, such an anticorruption agency played a key role in minimizing corruption. More specifically, CPIB in Singapore and ICAC in Hong Kong, being independent from any political power and being empowered to investigate bank accounts and to arrest without warrant any suspected persons, could effectively fight corruption. Both agencies have three-pronged functions covering not only investigation and enforcement, but also corruption prevention (Quah, 1995). This comprehensive anticorruption approach was suitable for fighting deeply seated corruption in these two countries.

Discussion and conclusion

Taking pervasiveness and arbitrariness, two new constructs associated with the well-known phenomenon of corruption, we have discussed the differential effects of corruption across Asian countries, the impact of corruption on FDI, and the effective ways of combating corruption. This paper is mainly motivated by the question as to why some Asian countries were able to achieve high economic growth in the midst of high level corruption while other countries suffered from economic stagnation. Extending the existing literature, we suggest that examining both pervasiveness and arbitrariness of corruption can demonstrate a more realistic picture for these puzzling Asian economies. This two-dimensional framework of corruption provides a new and consistent way of explaining differential economic growth, FDI inflows, and effective use of anti-corruption strategies in Asia. That is, besides the extent of pervasiveness of corruption, the level of arbitrariness of corruption would differently affect the economic development and FDI inflows among countries where the degree of pervasiveness of corruption is similar.

This line of research, however, has rarely been addressed in the management literature and arguments here need to be verified with empirical testing. Uhlenbruck et al. (2006) adopt these two-dimensions and show the differential effects of pervasiveness and arbitrariness on entry strategy in emerging economies. Corruption appears to be diverse across countries, economies, industries, and firms in terms of its characteristics and patterns. For instance, Japan has maintained a good reputation for low pervasiveness and low arbitrariness of corruption. However, when we look into a certain private sector, Sumo wrestling in Japan, we do find that there are corrupt aspects in any given country. In Sumo wrestling, the eighth winning record is critical. So there is more corruption involved in the eighth winning match than in other rounds. First, it is pervasive since most Sumo players do this. Second, it is not arbitrary since for the opponents who have not accumulated seven previous wins, winning the game is not as important as the one who needs the eighth winning (Duggan & Levitt, 2002). The player who needs to win at the eighth round must compensate the opponent in certain ways such as payments in return and losing future matches. This is why the opponents, having lost the eighth game, usually win in the subsequent games. Overall, while a small number of past studies exist (see Appendix 1), it would be worthwhile to probe deeper into corruption in Asia. For example, Hill (2007) recently looks at the issue of digital piracy in Asia, which may be related to corruption.

Second, extant literature on corruption has been more focused on government corruption at the country level of analysis from the demand side, which heavily emphasizes economic effects such as economic development, poverty, and growth (i.e., Campos et al., 1999; Mauro, 1995, 1998; Tanzi, 1998; Wei, 1997, 2000). Although research on the impact of corruption on firms is recently highlighted (Habib & Zurawicki, 2002; Uhlenbruck et al., 2006), less attention was paid to this line of research: the so-called supply side of corruption. While informative, the demand side literature paid less attention to the heterogeneity of firms in bribery and the interactions between government officials and firms. The supply side or “endogenous corruption” literature does focus on the firm’s perspective (Barreto, 2000; Blackburn, Bose, & Haque, 2004; Milovanovic, 2002). However, even in this literature, relatively little is known about the relationship between the nature of corruption and its cost to firms (Herrera & Rodriguez, 2003). It would be worthwhile to approach a study in this direction.

Some work has also been done in the management and international business. Much of the work focuses on corruption in the context of FDI (Habib & Zurawicki, 2002; Rodriguez et al., 2005; Sanyal, 2004, 2005; Uhlenbruck et al., 2006; Voyer & Beamish, 2004). However, there have been only a few attempts to examine corruption from a management perspective (Ashforth & Anand, 2003; Gordon & Miyaki, 2001; Luo, 2002; Zahra, Priem, & Rasheed, 2005). As a future direction, we suggest more research on endogenous corruption from a management perspective.

Third, current studies on corruption in Asia and in other areas have mainly dealt with static features of corruption. However, as shown in the India case described above, the corruption environment has changed over time. In this sense, a longitudinal study on change in the level of corruption would warrant an interesting angle. Fourth, because of the nature of corruption, research on corruption suffers from the lack of reliable and comprehensive primary and secondary data. No wonder there are calls for creative methods and techniques for collecting not only macro-level but also micro-level data on corruption (Reinikka & Svensson, 2005). Experimental design (i.e., Bertrand et al., 2006) and qualitative methods besides traditional quantitative studies can also be an interesting way of doing research on corruption (Svensson, 2003).

In the current global economy, corruption is not an issue of individual countries but rather a world-wide problem that requires regional or international cooperation. For instance, US MNE subsidiaries in highly corrupt countries have suffered from the difference in corruption between home and host countries -- hardship coming from the gap between the level of corruption between home country and host countries (Oh & Lee, 2006; Kostova & Roth, 2002). In fact, US Congress enacted the FCPA in 1977 to bring a halt to the bribery of foreign officials, which back-fired because many US MNEs cried out loud that they could not do business in the host countries with their hands tied. After for so many petitions, finally, the FCPA was amended in 1998 to allow ‘grease payments.’ This US case shows that an individual country’s efforts on curbing corruption may not work easily. This shows that a worldwide cooperation network to combat corruption is in need.

Footnotes
1

The measurements of these two dimensions were obtained from the World Bank World Business Enterprise Survey (WBES). Following Campos et al. (1999) and Wei (1997), we measured the two dimensions of pervasiveness and arbitrariness. We dropped outliers in calculations.

 
2

The study surveys 14,405 respondents across 20 main states, which covered 151 cities and 306 villages. Its focus is on petty corruption in 11 public services: police, judiciary, land administration, municipal services, governmental hospitals, electricity, income tax, water supply, school, PDS (ration card/supplies), and rural financial institutions.

 
3

Anwar Ibrahim himself, having clashed with Mahathir, was subsequently imprisoned, which created further confusion among firms which had traditionally followed him (Business Week, 2001).

 
4

Originally cited in Quah (1999).

 
5

Neighboring countries such as Bangladesh and Sri Lanka report only 10 and 4% of punitive actions following corruption charges (Ahmad & Brookins, 2004).

 
6

Thaksin, due to the launch of a coup against him, recently had to step down in 2006.

 

Copyright information

© Springer Science+Business Media, LLC 2007