Many companies operating in poor countries assume that corruption is pervasive, and that payoffs are an inevitable fact of doing business there. According to a survey of American business leaders, more than half of the respondents affirmed that they would, under certain circumstances, bribe a foreign official in order to gain a desired contract-an act which is illegal under US law (Obreja, 2002). Their justifications were based on the ideas that business abroad could not be conducted without such bribes and corruption, that cultural differences made American business ethics inapplicable, and that such payments might not be illegal under foreign law. This attitude is eventually creating cycle of corruption in which foreigners continue to bribe because they think they have to, and officials continue to extort because they know they can.
Ultimately, Individuals perceptions are the core of causing corruption. There are four main individual factors that might cause corruption: greed, integrity/honesty, wages/salaries, and to maintain power. Greed – individual greed, whether it be of an official, government leader, or a company executive all lead to actions that may be corrupt. Integrity/honesty – some individuals are dishonest by nature and are more prone to acting illegally than others. Wages and salaries – in some poorer countries the salaries of government employees are so low that they cannot take care of the needs of their families. In desperation and by necessity these individuals take bribes to augment their incomes. To maintain power – some leaders of autocratic governments resort to taking bribes in order to continue their rule and maintain their ostentatious lifestyle. The bribes, provides funds to pay off a few political allies and some key loyal officials who then support the rule of the individual.
2.2 Corruption and Ethics
Corruption is an issue that relate to ethics closely. Ethics is concerning with the discipline dealing with what is good and bad. Corruption has several meanings, depending on whether it takes place in the public or private sector; however, for most people corruption is something unethical, and something considered wrong. What is wrong with corruption? One of the main forms of corruption is bribery. It is prohibited in almost all countries in the world, from poor to rich, developing to developed, for example, Indonesia and US. Inefficient companies are both more likely to bribe, and to bribe more than an efficient company, because it has more to “gain” from doing so. However, corruption is an abuse of public office for private gain and it is often means governance problems and hurt economic development. Moreover, an ethical behaviour can be costly, but if ignoring the ethics, it cost more. Private companies have to consider profit maximization and have the responsibilities to satisfying stakeholders such as employees and local communities, global companies are beginning to accept a broader range of responsibilities. Is corruption a profit maximizing strategy? Companies pay bribes to get favored contracts, entry to markets and so on. Otherwise a less competent company may win the deal. However, corruption and bribery causes more damage to business, society, government and economic development are far more than any perceived benefits. Corruption is a symptom that something has gone wrong in the management of the state. Institutions designed to govern the interrelationships between the citizen and the states are used instead for personal enrichment and the provision of benefits to the corrupt. The price mechanism, so often a source of economic efficiency and a contributor to growth, can, in the form of bribery, undermine the legitimacy and effectiveness of government. Corruption and bribery encourages competition in bribery, rather than in quality and price of goods and services. It inhibits the development of a healthy marketplace. Above all, it distorts economic and social development and nowhere with greater damage than in developing countries...Most important, the heaviest cost is typically not in the bribes themselves but rather in the underlying economic distortions they trigger and the undermining of institutions of administration and governance. (Ellis, 2001) But undoubtedly, although corruption is considered “unethical”, bribery and corruption are a reality in many countries, especially emerging economies.
2.3 Defining Globalisation
Globalisation is a complicated and evolving process, but it could be simply described as the "free" exchange of capital and money, information, people and ideas across the world. There are three main causes of globalisation that can be easily identified: i.e. deregulation, technical innovation, and the emergence of both regional and global trading blocs.
Globalisation is a process that encourages the interactions of people in different countries, and economic globalisation is an important part of globalisation. According to Georgios I. Zekos (2003), there are three primary factors have affected the process of economic globalisation and they are likely to continue driving it in the future. First, improvements in the technology of transportation and communication have reduced the costs of transporting goods, services, and factors of production and of communicating cost-effectively useful knowledge and technology. Second, the tastes of individuals and societies have generally, but not universally, favoured taking advantage of the opportunities provided by declining costs of transportation and communication through increasing economic integration. Third, public policies have significantly influenced the character and pace of economic integration, although not always in the direction of increasing economic integration.
The benefits of globalisation are obvious, for example, people can get access to products and services from all over the world, as well as greater variety of things to buy and experience. Foreign investment in a country can help the government raise money for healthcare, education and improve people's lives. Globalisation has been argued to have disadvantages, In the BBC survey mentioned earlier, globalisation is actually ranked top problem in the world concerned by people. Despite the benefits, what's wrong with globalisation? Powerful multinational companies become responsible for decisions about where to set up factories, where to close them down, which countries to invest in and how they treat their employees. These multinational companies may make such decisions bases on what makes the best profit for them, and they may ignore some environmental and social ethical issues. For example, Nike has been accused to exploit workers in its Southeast Asian factories. Therefore, one of the disadvantages of globalisation is the lack of accountability. Globalisation also increases vulnerability. The power of multinational companies can leave governments and workers vulnerable. For instance, if a company decides to relocate their business, or reduce the size and then cause unemployment, the government has to be responsible and expected to pay for the workers or find replacement jobs for them. The other problem related to globalisation is poverty, the poor side of the world have yet to see much benefit from globalisation, some even argue that globalisation enlarge the gap between poor and rich. Especially the presence of multinationals can often increase the gap within the same country. Sometimes when global or local economic conditions change, an investment can disappear quickly. Therefore the development that comes with globalisation could be unsustainable. Finally, the presence of global brands and the sophisticated advertising used to sell them makes every place start to look the same, for example, people buy the same burgers and want to wear the same few brands of clothing. And because of the power of the multinational companies, local companies and brands of food, clothing, etc may find it hard to compete. Therefore certain culture or religious values may be undermined when the global influences become very strong.
2.4 Corruption and Globalisation
What does corruption have to do with globalisation? Actually, they are closely related. While most people view corruption as harmful and have negative impact to societies and governments, some point out that there are possible benefits of corruption to globalization, for example, it can speed up the long and slow business procedures, the excluded can get access.
Corruption has been so pervasive in recent years. While there are numerous negative effects between each other, is corruption ever a “good” thing to businesses? Some people suggest that corruption is the “grease” as the beneficial consequence of corruption. When thinking of the economic benefits of corruption, it can be argued that the economic benefits of corruption can even outweigh the costs and that corruption may not be harmful to growth and development, and sometimes it may even facilitate them. For some businesses, buying or selling political favors may provide political and economic advantages, therefore corruption and bribery reduce unnecessary business and political procedures as “greases the wheels”, therefore the business efficiency improved and they actually speed up the wheels of commerce.
However, the above theory has been dismissed for a long time. There are a numerous empirical studies providing overwhelming statistical evidence to show that countries with high corruption levels have poorer economic performance. There are several channels through which corruption hinders economic development and growth: for example, it reduces investment (both domestic and foreign), distorts the size and composition of government expenditure away from education, health and the maintenance of infrastructure towards less efficient projects that have more scope for manipulation and bribe-taking opportunities, and it weakens the financial and tax system, strengthening the underground economy and encouraging links to organised crime groups. Furthermore, a strong connection has been demonstrated between corruption and increasing levels of poverty and income inequality.
Moisés Naím in Corruption Eruption (1995) states that Macy's recently announced its withdrawal from the clothing industry in Myanmar, stating that it was "impossible to make money there," because corruption "makes normal operations impossible." Moreover, US businesses are forbidden by the 1977 Foreign Corrupt Practices Act from paying bribes in order to gain contracts. As a result, US companies often feel they are at a disadvantage in a world where many of their international rivals do pay bribes and, in some cases, even declare payoffs a tax deduction. However, the ability to bribe is, at best, a costly advantage-in 1994, the French armament industry spent approximately 60 billion Belgian francs bribing foreign official for contracts. Businesses operating in emerging countries, such as in China also sometimes have to conduct similar practices, for instance, businesses operating in China spend between 3 percent and 5 percent of their operating costs on “gifts” to officials. This money is often spent privately. The results of these actions are obvious; the companies may take advantage of the “gifts” given to the officials, and gaining favored contracts or easier entry to the market, but the reverse effect is much more serious, if corruption is a common problem in a country, other companies won’t consider entry to the country, therefore the competition within a country reduced, and vice-versa, if a company has the reputation of corruption, it will be hard for the company to do businesses anywhere in the world.
In fact, corruption is not just a frustrating concern for the companies, but it is also a concern for the governments. In many developing nations, the waste of fund, and the decreasing efficiency caused by corruption are often serious. According to Corruption in transition economies (Gray, 2005), In Kenya last year, three banks failed as a result of corrupt practices involving campaign funds. In Ecuador, the cost to the state annually is estimated at $775 million, 9.5 percent of the GDP. It is estimated that bribes and blackmail add a 50 percent surtax onto Russian consumer goods. Even China, with its reputation as an economic powerhouse, has lost an estimated $50 billion due to the deliberate undervaluing of state assets by public employees.
From the business point of view, a corrupt economy does not provide fair market opportunities. Corruption affects mainly in terms of economic development, which is a main part of globalisation.
As mentioned, a corrupt economy does not provide equal opportunities to companies. The bribes only raise overall costs. In general, high level of corruption effects economic development and economic growth. Besides its impact on economic growth, corruption also has been shown to worsen poverty (Neelankavil, 2003). For developing countries, corruption has a serious influence on the flow of FDI. These countries need FDI to grow economies, increase employment, and obtain necessary capitals. Shang-Jin Wei suggects that Corruption may hinder a country’s ability to absorb the beneficial side of globalisation, by reducing foreign direct investment (FDI). Corruption may also make a country more vulnerable to the risks of globalization by increasing the likelihood of a currency. (2001)
Corruption reduces the benefits of globalisation. Globalisation encourages more flow of trade and investment among countries, international economies are more integrated. It helps the people in developing and less developed countries to improve living standards and reduce poverty. Increased Foreign Direct Investment (FDI) is one of the main benefits of globalisation, and it is especially important for less developed and developing countries. These countries may rely on it heavily in order to develop. In recent years, international direct investment has been expanding very rapidly. According to Corruption and Globalisation (Wei, 2001), in 1999, sales of foreign affiliates of multinational firms were US $14 trillion, nearly twice as high as global exports of goods and services. A small number of countries in the industrial world receive about two thirds of this investment. One of the main benefits of globalisation is promoting economic growth. If a country is corrupt, will it receive less benefit from it than those who are not? The answer is yes. Corruption damages and slows down the growth of countries. Corruption is a major impediment to the economic progress of developing countries. For international companies that are aiming to developing countries, they may pay bribes and deal with official extortion; this is actually equivalent to facing an extra tax. Foreign companies may gain advantage of business because of the bribes they paid. However, according to Shang-Jin Wei’s research in Corruption and Globalzation (2001), while such companies obtain profits from bribery, the country loses. For every dollar of business that these firms obtain, the country loses hundreds of dollars of potential foreign investment. Companies are less likely to invest while a country is considered corrupt.
As Shang-Jin Wei’s research in Corruption & Globalisation estimates that an increase in host country corruption from a low level, such as that in Singapore, to a higher level, as in Mexico, has the same negative effect on inward FDI as raising the corporate tax rate by 50 percentage points. (2001) It is clear that even in the countries such as Singapore, where the corruption is relatively low, corruption has the same negative effect on inward FDI to countries such as Mexico, where the corruption are more widespread. As mentioned above corruption can be concerned like companies paying extra tax. This is important to be noticed, although it is like a tax, from the government point of view, it doesn’t generate any tax revenue. If anything, corruption typically erodes the domestic tax base. (Wei, 2001) Developing countries are eager to attract FDI in order to grow; one of the methods is that offering low tax to attract foreign companies. When corruption exists, the “tax” for foreign companies will as a result increase. Shang-Jin Wei suggests that reducing corruption could in fact be more effective in achieving FDI growth, without sacrificing government revenues. (2001)
Corruption raises globalisation’s risks. Corruption also brings risks to countries, especially emerging market countries - the very important players in globalisation of economic. In particular, international capital flows can be volatile, and subject to frequent reversals. When a dramatic reversal occurs, currency crises and deep recession can occur in some of these countries. (Wei, 2001) Corruption affects the capital flows into a country, and makes them unstable and risk.
Due to the reduction in flow of capital, corruption effects GDP growth. Between 1995 and 2025, countries such as China, Indonesia, India, and Nigeria are projected to contribute more than half of the world GDP grow. (Neelankavil, 2003) But, these four countries are also among the most corrupt in the world, which will result in an inefficient world economy. Price and quality of finished goods are also affected in countries where there is high-level of corruption. Since bribery takes place in secret, access to market is artificially set, therefore it excludes competitive forces that could have put pressure for setting competitive quality and price.
Many international companies have started including CPI has yet another variable along with economic risk and political risk in evaluating countries for investing. (Neelankavil, 2003) Therefore, international companies bypass countries that have a high-level of corruption. As a result, these countries lose out on valuable inflow of foreign capital. Hence the pace of globalisation is slowed down.
Furthermore, there is widespread recognition of the negative consequences of bribery and corruption internationally, regionally and domestically. Lala Camerer (2002) summarises the effects of bribery and corruption as following:
- It affects the economy by undermining growth and development through hindering or deterring foreign and or local investment.
- It affects the quality and composition of public expenditure projects;
- It undermines the fiscus through non-optimal collection of taxes and revenues as the unofficial underground economy flourishes;
- It distorts policy and resource allocations, thereby increasing inefficiency;
- It undermines trust and credibility in institutions and procedures;
- It threatens human security through linkages with drugs and organised crime, and
- Because of the unjust access it facilitates to often limited social and political goods and services, corruption can create social and political unrest if it goes unchecked. In addition:
- Corruption takes its greatest toll on the poor; and
- Corruption bites into the moral fibre of society.
- Corruption negatively impacts on investment and growth
- Corruption negatively affects investment by creating uncertainty
- Corruption undermines revenue collection stimulating the underground economy
- Corruption distorts public expenditure and resource allocation
- Corruption impacts negatively on industrial policies and business development
- Corruption undermines efficiency
- Corruption exacerbates poverty and inequality.
It has been clear that corruption has heavy negative impact on globalisation. Benefits of globalisation are eroded by corruption. But on the other hand, does globalisation itself increases corruption? There is no clear evidence of that, however, corruption has been paid much more attention nowadays in the globalising world than in the past. Globalisation make countries’ borders open and business environment more competitive. Critics of globalisation have long argued that an inevitable rise in corruption is among the ill effects of opening national borders to greater trade and investment flows. (Kearney, 2001) In recent years the increased transnational business operations and international trade have been stimulated by economic reforms in many countries, they have also introduced numerous opportunities into emerging economies. The companies have got more options for international investment due to the increased opportunities in the new countries. Corruption has become one of the most important relevant factors in deciding where to invest. The contacts between less corrupt and more corrupt countries have intensified in the last decade. All indications are that the number of cases of corruption is on the rise. This may be due to the involvement of many more companies in international business or because of the larger number of countries that are now open to these companies.
2.5 Solutions
Globalisation has made changes in political, economic and social standards of the world. The globalisation of business and communications systems has also created a very complex web of global interactions. Money is flowing in and out of countries at a higher rate than never before. Therefore, it is increasingly difficult to discover corruption. However, corruption has always existed. The problem is sometimes dismissed in some countries in the world.
As there are factors that contribute to high-level of corruption, researchers have been able to identify variables that deter corruption. According to Neelankavil (2003), the types of variables that hinder corruption are:
- Relatively efficient bureaucracy. Efficient bureaucracy negates the need to bribe officials and therefore deters corruption.
- Free and open democratic system of governance.
- Well functioning political system
- Access to public records
- A well functioning legal system
- High level of trust between citizens and their elected officials
- Low level of tolerance towards corruption
In order to reduce worldwide corruption, individual governments of the country international organisations, and international firms should all be responsible for the effort. Governments in some of the most corrupt countries have to have programs to reduce the increase of corruption. Since, most of the countries that have high-level of corruption are economically underdeveloped; the incentives for these countries to get rid of corruption must be economic. Through greater foreign direct investments, transfer of technology from industrialised countries, and reduction in unemployment, these countries can attain an high level of economic growth. Entry of foreign firms will increase competition, which along with reduction in government subsidies that are quite common in the developing countries has been found to decrease corruption. (Neelankavil, 2003)
Neelankavil (2003) suggests some more specific steps that countries with high level of corruption should undertake:
- Enact anti-corruption regulations
- Setup monitoring systems
- Penalties
- Codes of conduct for government employees
- Incentive systems for government employees
- Better salary structure for government employees
- establish democracy
The key participants in the corruption process are the international companies, who try to use influence, gifts or bribes to get better deals from host nations. Neelankavil (2003) suggests that international companies should implement the following specifically:
-internal code of conduct
-employee training
-adhere of rules
-providing funding
The above steps are not easy to implement, especially for developing countries, they require funds, training, even changes in attitude. However, they may be beneficial from globalisation, trading blocs, international organisations such as the World Bank, and IMF, even developed countries could be great help. By providing funds, training, monitoring systems and so on.
3. Conclusion
International business corruption is a worldwide phenomenon that may not end in a very long time. On the other hand, its effects on economies are very damaging. Enormous efforts are being made to reduce corruption by some of the developed countries, i.e. international organisations such as the OECD, and Transparency International. They have succeeded to some extent in publicizing the problem. Even with these efforts, the number of cases of corruption has not abated; especially corruption in a small scale will continue to survive. There are more corruption cases reported each year. Globalisation is inevitable. We cannot deny that globalisation somehow increases corruption. However, corruption then reduces the benefits of globalisation itself. Therefore, the effort to reduce corruption must be continuous in the future. And the process of globalisation should be able to lead a "harmonization" of ethical and moral principles in business as well as in a better understanding of the problems with corruption.
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