Skip to main content

Advertisement

SpringerLink
Log in

Service Offshoring and Corruption: Do Firms Escape Corrupt Countries?

  • Published:
Journal of Industry, Competition and Trade Aims and scope Submit manuscript

Abstract

We analyze how service offshoring by Swedish firms is affected by corruption in source countries. The results suggest that firms avoid corrupt countries and that corruption reduces the volume of service offshoring. Analyzing firm heterogeneity, we find that large and internationalized firms are the ones that are the most sensitive to corruption. In addition, sensitivity to corruption tends to increase with falling income in source countries. These results suggest that the gains from reduced corruption may be the greatest for poor countries.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. In the year 2000, the service sector’s contribution to total value added in OECD countries was 70 %, which was approximately the service sector share for Sweden (69.4 %) in the same year. The share of services of world exports has stayed at approximately 20 % during the last two decades (Lejour and Smith 2008; UNCTAD 2009).

  2. Acknowledging that corruption can be seen as a general index of institutional quality, Márquez-Ramos et al. (2012) showed that institutional barriers have a greater impact on trade flows than tariff barriers.

  3. Analyzing corruption and trade, Méon and Sekkat (2006) used the World Bank governance data of Kaufman et al. (1999) and found that a low level of corruption, well-functioning rule of law, government effectiveness and lack of political violence were all positively correlated with exports in manufactured goods. Similar results were found by Bandyopadhyay and Roy (2007). Acknowledging that corruption can be viewed as a general index of institutional quality, the evidence suggests that weak institutions (a corrupt environment) hamper both inward FDI and trade.

  4. See, e.g., Shleifer and Vishny (1993) and Wei (2005).

  5. See, e.g., Hart and Moore (1990), Grossman et al. (1986) and Hart (1995).

  6. A related literature examines taxes as a component of firm FDI decisions (Blonigen 1995; Devereux et al. 2008). However, offshoring is more concerned with sourcing inputs from an agent in a foreign jurisdiction and less concerned about investment, suggesting that taxes are less relevant for offshoring. In addition, tax data for the countries and period of interest in this analysis is not available. Therefore, the question of taxes as determinants of offshoring is left for future research.

  7. We use firm-level data, and for an individual firm, the level of corruption and other country characteristics are likely to be taken as given. As a robustness test, we have applied the commonly used approach of lagged covariates to address endogeneity (Hendry 1995; Greenaway et al. 2008). The results are robust with respect to the use of lagged covariates. Results available on request.

  8. Tests for the exclusion restriction indicate that these variables are valid. Bernard and Jensen (2004) used firm skill intensity to explain selection with respect to internationalization. The idea is that highly productive and skill-intensive firms are more internationalized than other firms. Similarly, exporters have overcome internationalization barriers and are therefore more likely to engage in service or production offshoring.

  9. See the Appendix for details on the applied regions.

  10. See the Appendix for variable definitions and sources.

  11. Due to incomplete information on some variables for small firms, we limit the analysis to firms with at least 50 employees.

  12. Swedish trade in services equals approximately 20 % of total trade.

  13. Knack and Omar (2003) discuss a set of corruption indices and show that despite methodological differences, the difference between the indices is minor.

  14. A simple correlation analysis between corruption freeness and service offshoring to different countries indicates that the correlation is just over 70 %.

  15. More information on CEPII’s distance measure is found in Mayer and Zignago (2006).

  16. In the Heckman specifications, variables used as exclusion restrictions, the share of skilled labor and export intensity, are highly significant, and significant results for the Mills ratio and test of independent equation (rho = 0) suggest that selection into service offshoring is not random and that the selection models are justified.

  17. As noted by Santos Silva and Tenreyro (2006, 2011), the PPML estimator is capable of handling models with several dummies with retained properties; thus, in Table 1, we estimate a PPML model including 21 region dummies and one model with the full set of country dummies.

  18. As a stability test, we estimated models with both the WB and the International Transparency corruption (IT) index giving close to identical results. Due to the greater coverage of the WB index, this is chosen as our prior choice. Estimations with the IT index are available upon request.

  19. Since count regression techniques model the log of incident counts, the coefficients can be interpreted as follows: for a one unit change in the independent variable, the log of dependent variable is expected to change by the value of the regression coefficient.

References

  • Alvaro C-C (2006) Who cares about corruption? J Int Bus Stud 37:807–822. doi:10.1057/palgrave.jibs.8400223

  • Anderson JE, van Wincoop E (2003) Gravity with gravitas: a solution to the border puzzle. Am Econ Rev 93(1):170–192

    Article  Google Scholar 

  • Antràs P (2005) Incomplete contracts and the product cycle. Am Econ Rev 95(4):1054–1073

    Article  Google Scholar 

  • Antràs P, Helpman E (2004) Global sourcing. J Polit Econ 112(3):552–580

    Article  Google Scholar 

  • Antràs P, Helpman E (2006) Contractual frictions and global sourcing. NBER working papers, No. 12747

  • Bandyopadhyay S, Roy S (2007) Corruption and trade protection: evidence from panel data. Federal Reserve Bank of St. Louis. Working paper No. 2007-022

  • Bergstrand JH (1989) The generalized gravity equation, monopolistic competition, and the factor-proportions theory in international trade. Rev Econ Stat 1(1):143–153

    Article  MathSciNet  Google Scholar 

  • Bernard A, Jensen JB (2004) Why some firms export. Rev Econ Stat 86:561–569

    Article  Google Scholar 

  • Bernard A, Bradford J, Redding S, Schott P (2011) The empirics of firm heterogeneity and international trade. NBER Working Paper No. 17627

  • Blonigen BA (1995) A review of the empirical literature on FDI determinants. NBER working Paper No. 11299

  • Bose N, Capasso S, Murshid AP (2008) Threshold effects of corruption: theory and evidence. World Dev 36(7):1173–1191

    Article  Google Scholar 

  • Brada JC, Drabek Z, Perez MB (2012) The effect of home country and host country corruption on foreign direct investment. Rev Dev Econ 16(4):640–663

    Article  Google Scholar 

  • Caetano JMM, Caleiro A (2005) Corruption and foreign direct investment, What kind of relationship is there?, Economics Working Papers 18_2005, University of Évora, Department of Economics, Portugal

  • Chaney T (2008) Distorted gravity: the intensive and extensive margins of international trade. Am Econ Rev 98(4):1707–1721

    Article  Google Scholar 

  • Crinò R (2007) Skill-biased effects of service offshoring in Western Europe. No 205, KITeS Working Papers, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita’ Bocconi, Milano, Italy

  • Dahlström T, Johnson A (2007) Bureaucratic corruption, MNEs and FDI. CESIS Electronic Working Paper Series No. 82

  • De Mello-Sampayo F (2009) Competing-destinations gravity model: an application to the geographic distribution of FDI. Appl Econ 41(16–18):2237–2253

    Article  Google Scholar 

  • Devereux MP, Lockwood B, Redoano M (2008) Do countries compete over corporate tax rates? J Public Econ 92(5–6):1210–1235

    Article  Google Scholar 

  • Egger PH, Winner H (2006) How corruption influences foreign direct investment: a panel data study. Econ Dev Cult Chang 54(2):459–486

    Article  Google Scholar 

  • Fors M, Jansson R (2006) Trade in goods and services. Internal background memorandum. Statistics Sweden

  • Greenaway D, Gullstrand J, Kneller R (2008) Firm heterogeneity and the gravity of international trade. University of Nottingham, GEP, Discussion Papers No. 08/41

  • Greene W (2001) Estimating econometric models with fixed effects. New York University, Leonard N. Stern School Finance Department Working Paper Seires 01-10, New York University, Leonard N. Stern School of Business

  • Grossman GM, Helpman E (2002) Integration versus outsourcing in industry equlibrium. Q J Econ 117(1):85–120

    Article  MATH  Google Scholar 

  • Grossman GM, Helpman E (2003) Outsourcing versus FDI in industry equlibrium. J Eur Econ Assoc 1(2–3):317–327

    Article  Google Scholar 

  • Grossman GM, Helpman E (2005) Outsourcing in a global economy. Rev Econ Stud 72(1):135–159

    Article  MATH  MathSciNet  Google Scholar 

  • Grossman GM, Sanford J, Hart OD (1986) The costs and benefits of ownership: a theory of vertical and lateral integration. J Polit Econ 94(4):691–719

    Article  Google Scholar 

  • Habib M, Zurawicki L (2002) Corruption and foreign direct investment. J Int Bus Stud 33(2):291–307

    Article  Google Scholar 

  • Hagsten E, Karpaty P, Svanberg S (2007) Effects on productivity from Swedish offshoring. Statistics Sweden, mimeo

  • Hakkala K, Norbäck P-J, Svaleryd H (2008) Asymmetric effects of corruption on FDI: evidence from swedish multinational firms. Rev Econ Stat 90(4):627–642

    Article  Google Scholar 

  • Hart OD (1995) Firms, contracts and financial structure. Oxford Clarendon Press. ISBN 0-19-828881-6 (pbk)

  • Hart OD, Moore J (1990) Property rights and the nature of the firm. J Polit Econ 98(6):1119–1158

    Article  Google Scholar 

  • Hejazi W (2005) Are regional concentrations of OECD exports and outward FDI consistent with gravity? Atl Econ J 33:423–436

    Article  Google Scholar 

  • Hendry DF (1995) Dynamic econometrics. Oxford University Press, Oxford

    Book  MATH  Google Scholar 

  • Howells, J., Tether, B., (2004), Innovation in services: issues at stake and trends, final report, Commission of the European Communities, Brussels-Luxembourg

  • Jienwatcharamongkhol V (2013) Distance sensitivity of export: a firm-product level approach. J Ind Compet Trade 14(4):531–554

    Article  Google Scholar 

  • Karpaty P, Tingvall P (2011) Service-sector competition, innovation and R&D. Econ Innov New Technol 20(1):63–88

    Article  Google Scholar 

  • Kaufman D, Kraay A, Zoido P (1999) Aggregating Gouvernace Indicators. World Bank Policy Research Working Paper, No. 2195

  • Knack S, Omar A (2003) Trade intensity, country size and corruption. Econ Gov 4(1):1–18

  • Lejour A, Smith P (2008) “International trade in services”, editorial introduction. J Ind Compet Trade 8(3):169–180

    Article  Google Scholar 

  • Márquez-Ramos L, Martínez-Zarzoso I, Suárez-Burguet CC (2012) Trade policy versus trade facilitation: an application using good Old OLS. Industry & Innovation 6(11):1–38

    Google Scholar 

  • Massini S, Pern-Ajchariyawong N, Lewin AY (2010) Role of corporate-wide offshoring strategy on offshoring drivers, risks and performance. Ind Innov 17(4):337–371

    Article  Google Scholar 

  • Mattoo A, Stern RM (2008) Ch 1. Overview. In: A handbook of international trade in Services. Mattoo A, Stern M, Zanini G (eds). Oxford University press. ISBN 978–0–19–923521–6 (Hbk.)

  • Mayer T, Zignago S (2006) Notes on CEPII’s distance measures. MPRA Paper 26469

  • Melitz M (2003) The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica 71(6):1695–1725

    Article  MATH  MathSciNet  Google Scholar 

  • Méon P-G, Sekkat K (2006) Institutional quality and trade: which institutions? Which trade?. DULBEA Working Papers 06-06. RS, ULB, Universite Libre de Bruxelles

  • Miles I (2006) Innovation in services. In: Fagerberg J, Mowery D, Nelson R (eds) The oxford handbook of service industries. Oxford University Press, Oxford, pp 433–458. doi:10.1093/oxfordhb/9780199286805.003.0016

  • Niccolini M (2007) Institutions and offshoring decision. CESifo WP. No. 2074

  • North DC (1991) Institutions. J Econ Perspect 5(1):97–112

    Article  MathSciNet  Google Scholar 

  • Nunn N (2007) Relationship-specificity, incomplete contracts and the pattern of trade. Q J Econ 122(2):569–600

    Article  MATH  Google Scholar 

  • Overman H, Redding S, Venables T (2003) The economic geography of trade, production, and income: a survey of the empirics. In: Harrigan J, Choi K (eds) The handbook of international trade. Blackwell Publishers, London, pp 353–387

    Google Scholar 

  • Ramasamy B, Yeung M (2010) The determinants of foreign direct investment in services. World Econ 33(4):573–596

    Article  Google Scholar 

  • Rose-Ackerman S (1997) When is corruption harmful?. Background paper for World Development Report 1997

  • Santos Silva JCM, Tenreyro S (2006) The log of gravity. Rev Econ Stat 88(4):641–658

    Article  Google Scholar 

  • Santos Silva JCM, Tenreyro S (2011) On the existence of the maximum likelihood estimates in Poisson regression. Econ Lett 107(2):310–312

    Article  MathSciNet  Google Scholar 

  • Shleifer A, Vishny RW (1993) Corruption. Q J Econ 108(3):599–617

    Article  Google Scholar 

  • Smarzynska BK, Wei S-J (2000) Corruption and composition of foreign direct investment: firm-level evidence. NBER Working Papers 7969, National Bureau of Economic Research

  • UNCTAD (2009) Handbook of statistics. United Nations, New York and Geneva

    Google Scholar 

  • Wei S-J (2005) Does corruption relieve foreign investors of the burden of taxes and capital controls?. World Bank Policy Research Working Paper No. 2209

Download references

Author information

Authors and Affiliations

  1. Örebro University, 701 82, Örebro, Sweden

    Patrik Karpaty

  2. The Ratio Institute, Sveavägen 59, 103 64, Stockholm, Sweden

    Patrik Gustavsson Tingvall

  3. Södertörn University, 141 89, Huddinge, Sweden

    Patrik Gustavsson Tingvall

Authors
  1. Patrik Karpaty
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Patrik Gustavsson Tingvall
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Patrik Gustavsson Tingvall.

Appendix

Appendix

Table 1 Services offshoring and corruption
Full size table
Table 2 Heterogeneity. Heckman models
Full size table
Table 3 Service offshoring and corruption by type of offshored service
Full size table
Table 4 Variable descriptions
Full size table
Table 5 Firm characteristics
Full size table
Table 6 Variable construction and sources
Full size table
Table 7 The distribution of service offshoring by type and region for 1997–2002 in percent
Full size table
Table 8 Service imports and corruption freeness by country
Full size table
Table 9 The 22 regions
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Karpaty, P., Tingvall, P.G. Service Offshoring and Corruption: Do Firms Escape Corrupt Countries?. J Ind Compet Trade 15, 363–381 (2015). https://doi.org/10.1007/s10842-015-0197-5

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10842-015-0197-5

Keywords

JEL Classification

Search

Navigation