Does Corruption Pay Off? The Case of International Entrepreneurship

Corruption: The Public Enemy

Most people agree: Corruption is a thorny issue that damages the economy, hurts businesses, and provides for an unhealthy environment that makes it hard to plan for and engage in business endeavors. Fighting corruption is one of the few policies where most policy makers see eye to eye, at least publicly. Academic researchers often talk about corruption ‘sanding the wheel’ and halting economic activities, robbing individuals of their entrepreneurial initiative and slowing down if not reverting economic growth. Corrupt practices are also typically illegal, and individuals and firms engaging in corrupt exchanges are subject to criminal punishment. To sum up, corrupt activities are dangerous to the parties involved and are detrimental to everybody around. Why then do we see the problem of corruption to persist?

Does Corruption Pay Off? — Sergey Anokhin

Why does Corruption Persist?

The explanation, according to Entrepreneurship Professor Sergey Anokhin from Kent State University, lies in the fact that corruption may create lasting value for those who choose to engage in it. It is true that corruption is sometimes compared to sand in the wheel. At the same time, it is often compared to grease in the wheel of sloppy and ineffective bureaucracy. When institutional infrastructure is poor, rules are ill-defined, and it is not possible to have the government agencies do their duties diligently and expediently, many entrepreneurs consider the bribe a reasonable fee to ensure that the favorable decision is made fast. Corruption, in this sense, simply becomes a cost of doing business, and many entrepreneurs are rather indifferent about bearing such costs as long as it helps their businesses serve customers profitably.

There is, however, another side to why corruption is hard to root out, explains Dr. Anokhin. Business do especially well when the secret to their competitive advantage cannot be replicated by their rivals. If the customers want what the business can provide, and competitors cannot match it adequately, entrepreneurs are virtually ensured what management scholars call sustainable competitive advantage. Engaging in corrupt activities, suggests Sergey Anokhin, creates a situation where rivals may CHOOSE not to replicate such strategies for the fear of being caught and prosecuted. That is, while there is always a risk of getting caught for corrupt entrepreneurs, it is counterbalanced by the rewards of having no competitors engaging in the same practices, which leaves the money on the table for the less ethically inclined entrepreneurs. This is definitely true for the local entrepreneurs who know the environment and its key players well. Surprisingly, even international entrepreneurs who enter host countries with the limited knowledge of the local environment and have to simply rely on the corruptible human nature, seem capable to profit from pursuing corrupt ends.

Why does Corruption Persist? — Dr. Sergey Anokhin

Profiting from Corruption in the International Context

To study whether engaging in corrupt international activities is justified financially despite the risks, Professor Anokhin and Ahmad Al Asady, researchers from Kent State University, have followed nearly 1,000 international entrepreneurship from 57 countries in North America, South America, Europe, Asia, and Australia, who entered and operated in 9 countries in the Middle East region over the period from 2013 to 2017. Businesses had at least four employees and were rather stable, as less than 10% of them closed down during the studied period.

What the study found, according to Professor Anokhin, is deeply unsettling. International entrepreneurs who engage in corrupt practices boast higher sales and profits compared to those who do not. The results hold even after controlling for the entrepreneurs’ industry, firm size, entrepreneurs’ experience and social and professional connections, as well as the unique aspects of the entrepreneurs’ home countries. That is, corruption appears to pay off even for entrepreneurs who know little about the economic and institutional context of countries they enter. It is likely that the relationship is even stronger for domestic entrepreneurs who know the ins and outs of the local environments well.

The relationship between engaging in corrupt activities and profits gets stronger when host countries themselves are relatively corruption-free. It is possible, says Sergey Anokhin, that in this case corrupt international entrepreneurs do not face much competition from domestic actors and thus can expect to see higher returns to the technically illegal practices. The relationship is also more pronounced when international entrepreneurs come from countries where fear of failure is a major part of national psyche. Perhaps, suggests Dr. Anokhin, such entrepreneurs are more willing to take the risk of getting caught when engaging in profitable but illegal activities than to face the humiliation of business failure.

What it all means

The implications of this study are troublesome for policy makers hoping to win the war against corruption. As long as corruption pays off — which apparently it does — there would be those who are willing to take the risks to ensure higher profits, even if their actions damage the fabric of economic environment and undermine the trust in public authorities necessary for the effective functioning of the economy. Because entrepreneurs are innately more tolerant of risk, they are not discouraged from engaging in corrupt activities by the threat of legal action.

Two possible solutions emerge. One, perhaps naïve, is increasing the penalty for engaging in corrupt exchanges. If the downside of corruption outweighs the possible upside, it is likely that rational entrepreneurs will choose to pursue legitimate business opportunities instead. Two, a smart government policy may include ‘legalizing’ certain activities that are known to harbor a lot of corrupt exchanges. For instance, the system of legal ‘expedite fees’ that certain government agencies charge for providing their services faster removes the incentives for corrupt officials to seek bribes for speeding up the process. The logic is similar to the reasoning behind decriminalizing marijuana in a number of U.S. states. Once there is a legal way to obtain the benefits previously only available through corruption, the economic foundation that made corruption possible will dissolve, removing with it the opportunities to profit from illegal activities.

Corruption — what it all means? Professor Sergey Anokhin
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