bribery, particularly regarding the amount to be paid or the expected out- come of additional payments. According to the survey, the more firms pay, the more unpredictable is the result (see figure 2.6).
The individual firm’s response to bribery is not fully determined by its characteristics or its environment. Beyond averages, there are wide dif- ferences in vulnerability and in the acceptance of corruption in a corrup- tion-prone country (see figures 2.4–2.6). Another illustration of the idiosyncratic nature of attitudes toward corruption is that in a given coun- try the perception of corruption as a business constraint is only poorly correlated with actual vulnerability and other business constraints (see appendix B). In the end, there is room for better standards of behavior in which firms avoid being locked into the vicious circle of low growth and corruption.
Type of Industry
It is no secret that levels of corruption vary widely among industries. By their nature, deals in certain sectors provide more opportunities for grand corruption, given their higher degree of government involvement, discre- tionary powers, secrecy, and contract size. The most notoriously vulnera- ble areas are defense and public works.
Size of Firm
In large corporations, managers are themselves increasingly international or at least have international exposure, and the espoused values and busi- ness practices of large corporations are converging, partly as a result of increased sharing of experience in some areas. By contrast, managers of small and medium-size exporters from developed countries have limited awareness of policy and legal changes. Although these firms supply a small share of FDI flows to emerging economies and a minority share of exports, their practices are of growing concern to policymakers (Nether- lands 2001). Beyond OECD countries, practices of small and medium-size
Box 2.6. OECD Anti-Bribery Convention
The Convention on Combating Bribery of Foreign Public Officials in International Business Transactions was signed in December 1997 by OECD member countries and five nonmembers: Argentina, Brazil, Bulgaria, Chile, and the Slovak Republic. Slovenia signed in 2001.
Article 1 of the convention provides that:
Each (signatory) Party shall take measures as may be necessary to estab- lish that it is a criminal offense under its law for any person intentionally to offer, promise, or give undue pecuniary or other advantage, whether directly or through intermediaries, to a foreign public official, for that official or for a third party, in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of inter- national business.
This definition explicitly bans third-party bribery mechanisms. It implicitly allows facilitation payments, as they do not create an improper competitive advantage for the firm that pays them.
exporters appear to be an issue of concern in Singapore (see the case stud- ies in part II) and in Hong Kong (China).
Nationality
The conventional wisdom is that business practices differ greatly accord- ing to the nationality of the firm. Until the adoption of the OECD Con- vention in 1997, bribery in international trade and investment was recognized as acceptable to differing degrees, depending on the home country. Differences in national laws can affect the fairness of competi- tion, especially in export industries, and transnational bribery is therefore a politically sensitive issue. Indeed, the adoption of the OECD Conven- tion was driven not only by moral considerations but also by the per- ceived need to reestablish a level playing field for international firms from OECD member countries and other countries.
Does a firm’s home country influence its propensity to bribe? The Bribe Payers Index (BPI), issued by Transparency International since 1999 as a benchmark for assessing the implementation of the OECD Convention, strongly suggests that the answer is yes. The latest (2002) edition of the BPI is based on opinions gathered from 835 executives in 15 major emerg- ing markets. The executives ranked 21 leading exporting countries in terms of their corporations’ perceived propensity to pay bribes abroad (see appendix B).
The BPI differs widely by country (see table 2.5). Although the BPI pro- vides a rather disturbing assessment of the business practices of major exporting countries such as Germany, Japan, and the United States, it shows that no exporting country is perceived as bribe-free. East Asian economies fare rather poorly in this ranking—even those such as Singa- pore and Hong Kong (China) that have a high reputation for ethics at home according to the Corruption Perceptions Index (CPI).
From a policy point of view, a significant finding from the BPI statistics is that local firms are much more prone to bribery than firms from other countries (see the last row in table 2.5). This observation, supported by firm-level surveys (such as the WBES), is consistent with the idea that international corporations have a key role to play in spreading good prac- tices. But when the 2002 BPI was released, most comments in the interna- tional press not only pointed to the poor performance of major countries such as the United States but also concluded that the OECD Convention had not improved behavior in the private sector. Such a view conflicts with the results of the current study, which shows unambiguously that changes have been dramatic worldwide since the late 1990s. Appendix B
provides an alternative reading of the BPI that takes into account the probable bias introduced by differences in country size. It appears that larger exporters are not more bribe-prone and that there is even a plausi- ble positive effect of the OECD Convention. Other things being equal, exporters from countries that are parties to the convention might be less prone to bribery, compared with exporters from other countries, in a pro- portion that amounts to an improvement of 2 points on the BPI scale of 1 to 10.
Empirical research based on data on trade and foreign direct invest- ment provides strong evidence, both at the macroeconomic level and at the firm level, that international operators tend to avoid corrupt environ- ments. The research gives only weak support to the notion that the firm’s home country matters (see box 2.7).
Table 2.5. Perceptions of Propensity to Pay Bribes Abroad, Ranked from 10 (Best) to 1 (Worst)
Exporter BPI 1999 BPI 2002 CPI 2001
Australia 8.1 8.5 8.5
Switzerland 7.7 8.4 8.4
Sweden 8.3 8.4 9
Austria 7.8 8.2 7.8
Canada 8.1 8.1 8.9
Belgium 6.8 7.8 6.6
Netherlands 7.4 7.8 8.8
United Kingdom 7.2 6.9 8.3
Germany 6.2 6.3 7.4
Singapore n.a. 6.3 9.2
Spain 5.3 5.8 7
France 5.2 5.5 6.7
Japan 5.1 5.3 7.1
United States 6.2 5.3 7.6
Hong Kong (China) n.a. 4.3 7.9
Malaysia 3.9 4.3 5
Italy 3.7 4.1 5.5
Korea, Rep. of 3.4 3.9 4.2
Taiwan (China) n.a. 3.8 5.9
China 3.1 3.5 3.5
Local corporations n.a. 1.9 n.a.
n.a. Not applicable.
Note: BPI, Bribe Payers Index; CPI, Corruption Perceptions Index. The countries are listed according to their ranking on the 2002 BPI.
Source: Transparency International 2001, 2002a.
Box 2.7. Research on Avoidance of Corrupt Countries by International Firms
At least two papers contain empirical assessments of the impact of the U.S. Foreign Corrupt Practices Act (FCPA) on U.S. business opportuni- ties. Graham (1984) looked into the evolution of U.S. market shares before and after the passage of the FCPA, using a two-group classifica- tion of competitors’ practices as reported by U.S. firms, and found no significant effect on U.S. market shares as a result of the FCPA. Hines (1995) tested for the effect of corruption on four U.S. international busi- ness indicators: growth of foreign direct investment (FDI), capital- labor ratios, joint-venture activity, and aircraft exports. The results support the view that U.S. businesses are avoiding corrupt countries and might be losing business to more bribe-prone competitors. (The study does not provide a comparison with other OECD countries.)
Wei has investigated the link between the composition of financial flows and governance at the country level (Wei 2000a; Wei and Wu 2001). His model is based on a gravity determination of investment flows that includes variables such as country size, level of develop- ment, distance, and language. The results show unambiguously that FDI flows avoid more corrupt countries. Comparing the United States with Japan, Wei finds that American investors are more averse to cor- ruption than others. Smarzynska and Wei (2001) obtained similar results using firm-level data from Eastern Europe.
Lambsdorff (1998) examined how corruption can affect trade, using trade statistics from 19 major exporters into 87 markets. The underly- ing hypothesis is the same: international operators avoid corrupt mar- kets, but their aversion to corruption depends on the home country.
Unlike Wei (1997), this study uses a simplified gravity equation with market share as a dependent variable, which implies that aversion to corruption is measured only in relative terms. This research points to no significant effect for most countries, including the major East Asian exporters, but it does show that Swedish exporters are relatively more averse to corrupt markets than are their counterparts from Belgium, France, and Italy. (This type of analysis is a rather complex economet- ric undertaking, and several methodological variants are possible; see Wei 1997. Unfortunately, to our knowledge, this interesting research on trade data has not been supplemented by further work to explore alter- native econometric prescriptions and check the robustness of Lambs- dorff’s findings.)
Notes
1. The prisoner’s dilemma, described in 1950 by A. W. Tucker, is a non–zero sum game in which the players end up developing a “lose-lose”
strategy in the absence of cooperation.
2. According to the amendment, the concept of facilitation payments is theoretically more narrow than the practice described in the text.
Facilitation payments are not prohibited where they meet certain enu- merated criteria, including their “legality” in the place where they are made.
3. This topic delayed by a few years the enabling of the OECD Convention in British law, which does not explicitly make an exception for such payments.
4. Sources of information include press reports (Transparency International offers a good compilation on its Website) and investigative journalism (Backman 1999). Very thorough investigations are conducted by enforcement agencies such as the U.S. Securities and Exchange Commission (SEC) and the Independent Commission Against Corruption (ICAC) in Hong Kong (China). Some of these investigations are public (for instance, the SEC settlement report for violations of the Foreign Corrupt Practices Act, available at <www.sec.gov>) and provide a unique resource of thorough case studies on international bribery. Investigations by bilateral or multilateral agencies of fraud involving official develop- ment assistance are also good (but confidential) resources.
5. See, for example, the corruption data of the World Business Environment Survey carried out under the auspices of the World Bank (1999–2000) at <www.worldbank.org/wbi/governance/about.html>.
6. According to Hellman, Jones, and Kaufmann (2000), a signature of state capture is a positive relationship between bribery and firm growth:
the capturing firms pay more bribes at the expense of others’ business. A negative relationship appears to hold in East Asia and in noncapture countries in general.
7. For instance, in France commissions of up to 5 percent used to be legal, and the real rates on government procurement in many countries are reputedly much higher. Audits of some projects funded under French offi- cial development assistance showed that the difference between tolerated and effective rates could be attributed to dubious contracts with third
parties and that direct payments, even when tolerated, were not an important channel of bribes. In the United States, SEC reports on viola- tions of the Foreign Corrupt Practices Act suggest that noncompliant U.S.
companies make bribe payments only indirectly, through third parties.
(private communication, French Ministry of Finances; U.S. SEC).
8. Some excellent nontechnical digests are available, including Gray and Kaufmann (1998) and Tanzi (1998).
9. See Campos (2002) for an extensive treatment; see also appendix A regarding factors that explain the within-country variability of this perception.
3 3
After initial skepticism, companies worldwide are now adopting pro- grams to combat corruption. This chapter examines the reasons for the growing acceptance of these compliance programs.
Today’s voluntary approach to compliance was pioneered by U.S. com- panies in response to the scandals that led to the enactment of the 1977 Foreign Corrupt Practices Act. Refinements were pioneered by the U.S.
Defense Industry Initiative in the 1980s in the wake of serious irregulari- ties in defense procurement.1In the late 1990s, spurred by the OECD Anti- Bribery Convention approved in 1997, companies in other countries started to adopt U.S.-style corporate anticorruption programs, although with important modifications for local use. By then, U.S. corporations were refining the techniques.
Survey data and interviews in East Asia, Europe, and North America confirm that business codes have become a worldwide phenomenon. A Conference Board survey conducted in 2000 that requested information from member companies about their anticorruption programs found such programs in private companies operating in 42 countries, including 7 in the East Asia and Pacific region (Berenbeim 2000: 7–8).2 Credible anticorruption systems can be found in companies in emerging economies, including India and the Philippines. A Japan Corporate Gov- ernance Forum survey of 541 Japanese companies in January 2001 found that 55 percent of the firms surveyed had a code of conduct, 43 percent periodically held ethics training programs, and 37 percent had a depart- ment or division dedicated to ethics and compliance systems. Australia’s AS (Australian Standard) 3806 codifies the structural, operational, and maintenance elements necessary for an effective anticorruption compli- ance program: high-level commitment; statements, policies, and operat- ing procedures; management responsibility, supervision, and resources;
and record keeping and reporting.
This globalization of business conduct contrasts sharply with the con- centration in Anglophone countries found in a Conference Board survey a decade earlier. Except for the systems in North American corporations,
The Spread of Corporate
Compliance Programs
all of the programs investigated for the present study were designed and implemented in the 1990s, many of them after 1997.
Another indication of a global trend toward corporate compliance is the growth of supporting initiatives and organizations. For example, the U.S. Ethics Officer Association, created in 1992, now has more than 800 members. The European Business Ethics Network, with a more academ- ically oriented structure, is similar in size. Hong Kong (China) created a very active Ethics Development Center in 1995. A Business Ethics Research Center (BERC) was established in Japan in 1997 with the sup- port of major corporations. In the Republic of Korea 30 leading compa- nies have implemented the 1999 charter of the Federation of Korean Industries.
Until recently, skepticism in non-U.S. companies regarding what was known as the U.S. compliance-based model was rooted in one or more of three widely shared assumptions:
• When operating in different cultures, businesspeople need to tolerate local customs and practices. In many countries lavish gifts and fees for the performance of certain governmental duties are practices that are deeply rooted in the national culture.
• The design of the U.S.-developed compliance model is not adaptable to non-U.S. business organizations; it is too formalized and legalistic.
• In much of the world there is a serious stigma attached to being an
“informer.” For this reason, outside the United States the “whistle- blowing” information systems on which effective compliance systems rely heavily will not work (Berenbeim 2000: 7–8).
Skeptics have also doubted the effectiveness of the measures taken by U.S. firms, noting that in practice these firms did not seem to be acting more ethically than others, despite their company codes of values. (The poor ranking of the United States in Transparency International’s Bribe Payers Index reflects this perception; see table 2.5 in chapter 2.)
Yet company compliance systems are spreading throughout the world.
The reasons include changes in the legal framework and within compa- nies themselves.