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Corruption in international business

Article  in  Journal of World Business · September 2015

DOI: 10.1016/j.jwb.2015.08.015

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 CORRUPTION IN INTERNATIONAL BUSINESS *

Alvaro CUERVO-CAZURRA
Northeastern University, D’Amore-McKim School of Business
360 Huntington Avenue, Boston, MA 02115, USA
Tel.: 1-617-373-6568; Fax: 1-617-373-8628. E-mail address: a.cuervo-cazurra@neu.edu.

August 18, 2015

For the published version, please see:

Cuervo-Cazurra, A. 2016. Corruption in international business. Journal of World Business, 51: 35-49.

Abstract: I analyze corruption in international business, presenting a critical assessment of the topic and
providing suggestions for future research. I argue that corruption creates a laboratory for expanding
international business studies because its illegal nature, the differences in perception about illegality, and
the variation in the enforcement of laws against bribery across countries challenge some of the assumptions
upon which arguments have been built, i.e., that managers can choose appropriate actions without major
legal implications. Hence, I first provide suggestion for how to analyze the topic of corruption in future
studies by analyzing the types, measures, causes, consequences, and controls of corruption. I then provide
suggestions for how to extend leading theories of the firm by using corruption as a laboratory that challenges
some of the assumptions of these theories: extending agency theory by analyzing the existence of unethical
agency relationships; extending transaction cost economics by analyzing illegal transaction costs
minimization; extending the resource-based view by studying corporate social irresponsibility capability;
extending resource dependency by analyzing the ethical power escape; and extending the neo-institutional
theory by studying illegal legitimacy.
Keywords: corruption, bribery, international business, multinationals, theory

*I thank Editor Jonathan Doh for the invitation to write this article. For useful suggestions for improvement I thank Senior Editor
Kamel Mellahi, three anonymous reviewers, Abhijith Acharya, Jay Anand, Ilya Cuypers, Xuesong Geng, Reddi Kotha, Rich Smith,
Simon Schillebeeckx, Jamal Shamsie, Adam Tatarynowicz, Heli Wang, Cyndy Man Zhang, and the audience at the Singapore
Management University Strategy and Organization Research Camp. For financial support I thank the Patrick F. and Helen C. Walsh
Research Professorship and the Robert Morrison Fellowship at Northeastern University.

1
“Corruption charges! Corruption? Corruption is government intrusion into market efficiencies in the form
of regulations. That's Milton Friedman. He got a goddamn Nobel Prize. We have laws against it precisely
so we can get away with it. Corruption is our protection. Corruption keeps us safe and warm. Corruption is
why you and I are prancing around in here instead of fighting over scraps of meat out in the streets.
Corruption is why we win.” Danny Dalton in the 2005 movie Syriana (IMDb, 2015).
1. INTRODUCTION
This opening quote from the movie Syriana illustrates the tension found when analyzing corruption
in international business. Although all countries have laws that penalize corruption, it is still widespread
and some managers do not see corruption as a problem and will bribe to improve the advantage of the
company over competitors. This is despite the apparent consensus that corruption is bad for the country
because it involves government officials putting their interests before those of the citizens they are supposed
to serve. Countries with higher levels of corruption also have lower levels of growth (Mauro, 1995); less
investment (Lambsdorff, 2003); lower public policy effectiveness (Ades & Di Tella, 1997); less investment
in education and healthcare (Mauro, 1998a); lower inward foreign direct investment (Wei, 2000), and less
inward foreign direct investment from countries with laws against corruption, which are the largest foreign
investors (Cuervo-Cazurra, 2008). However, at the company level, the consensus about the impact of
corruption is not as clear. On the one hand, corruption results in the additional costs of the bribe itself and
of the managerial attention devoted to dealing with corrupt government officials (Kauffman, 1997;
Svensson, 2005). On the other hand, individual companies may be able to benefit from getting government
contracts (Cheung, Rau & Stouraitis, 2012), or from getting around complex regulations (Huntington,
1968). Thus, managers can rationalize corruption as another source of competitive advantage in corrupt
countries, or as a mechanism for reducing transaction costs in countries with high levels of regulation.
In this article I go beyond traditional reviews of the literature that provide detailed summaries of
the topic of corruption (see Aidt, 2003; Bardhan, 1997; Jain, 2001; Judge et al., 2011; Rose-Ackerman,
2004, or Svensson, 2005; and the two Handbooks edited by Rose-Ackerman, 2006, and Rose-Ackerman &
Soreide, 2011) and instead I provide a critical assessment and suggestions on how the analysis of corruption
can be used to extend the literature. I propose two types of extensions that future research can do: extending
our understanding of the topic of corruption, and extending our understanding of theories of the firm by
analyzing corruption.
I first provide a critical overview of the topic of corruption, reviewing the concept, causes,
consequences, and controls, and proposing potential research extensions on each of these. Specifically, I
suggest extending the study of the concept of corruption by analyzing the various types, differences between
measures and perceptions, and the diversity in the conceptualization of corruption across countries;
extending our understanding of causes by analyzing differences in the willingness and ability of government
officials and managers to ask for or provide a bribe, as well as their ability to reject the reception or payment
of a bribe; extending the literature on the consequences by analyzing the impact of corruption on
performance in the short and long term; and extending our understanding of controls by studying controls
on the demand and supply of bribes at the firm and country level.
I then argue that the illegal nature of corruption can serve as a laboratory for extending our
understanding of five leading theories of the firm – agency theory, transaction cost economics, the resource-
based view, resource dependence, and neo-institutional theory – and provide suggestions on how to extend
them. I analyze these theories because they are well-equipped for studying the relationship between
companies and governments in international business (e.g., Cuervo-Cazurra et al., 2014). Specifically, I
suggest extending agency theory by analyzing the existence of unethical agency relationships; extending
transaction cost economics by analyzing illegal transaction costs minimization; extending the resource-
based view by studying corporate social irresponsibility capability; extending resource dependence by
analyzing the ethical power escape; and extending neo-institutional theory by studying illegal legitimacy.
2. EXTENDING OUR UNDERSTANDING OF CORRUPTION IN INTERNATIONAL
BUSINESS
The topic of corruption has generated an expanding and relatively recent literature in international
business. Although bribery has happened since the beginning of history, with records in the Ancient World

2
banning it (Noonan, 1984), interest in the topic in international business started in earnest in the 1990s, with
changes in the attitudes towards bribery in international organizations like the World Bank, and the creation
of non-governmental organizations like Transparency International, that began to openly discuss, measure,
and analyze corruption (Clague, 2003). In this section I provide a critical review of the literature of
corruption in international business and outline research suggestions that can be analyzed in the future. This
review builds on and extends ideas presented in Cuervo-Cazurra (2014). Figure 1 provides the framework
for analyzing corruption in international business that summarizes the ideas discussed in this section.
*** Insert Figure 1 about here ***
2.1. Definition of corruption
There are several definitions of corruption, which reflect preferred views on the topic. These
include definitions highlighting its illegal nature, such as “an illegal payment to a public agent to obtain a
benefit for a private individual or firm” (Rose-Ackerman, 1999; p. 517), or its illegitimate nature, such as
“acts in which the power of public office is used for personal gain in a manner that contravenes the rules of
the game” (Jain, 2001; p. 73). Other focus on the underlying economic relationships, such as “monetary
payments to agents (both public and private) to induce them to ignore the interests of their principals and
to favor the private interests of the bribers instead” (Rose-Ackerman, 2006, p. xiv). And yet others focus
on government corruption and define it as “the sale by the government officials of government property for
personal gain” (Shleifer & Vishny, 1993; p. 599) or “the misuse of public office for private gain” (Svensson,
2005; p. 20).
A broad – and in my opinion great – definition of corruption is ‘the abuse of entrusted power for
private gain.’ This definition highlights three key characteristics of corruption. The first one is that a person
is abusing power entrusted to him or her by another person or persons, which can include not only citizens,
as is commonly the focus in government corruption, but also shareholders, employees, supporters, trustees,
etc. The second one is that the person is abusing that power, engaging in actions that are beyond his or her
position or mandate. And the third one is that the person is obtaining a benefit that only accrues to him or
her rather than to the organization for which he or she is working; implicit in this is that the costs of his or
her decision are then borne by the organization. Hence, this definition includes not only corruption in
government, but also corruption in firms (e.g., the apparent upgrading of the rating of AT&T by a star
analyst in Salomon Smith Barney in exchange for influence to get his children into an exclusive Manhattan
nursery school in 2000, described in Gasparino, 2002), international organizations (e.g., the payments to
officials of the United Nations during its food-for-oil program in Iraq from 1996 to 2003, discussed in Jeong
& Weiner, 2012, and Otterman, 2005), and non-for-profit and non-governmental organizations (e.g., the
suspected corruption of one of the partners of the Kenyan office that involved finance and procurement
staff of the Danish charity DanChurchAid in 2013, described in DanChurchAid, 2015).
2.2. Types of corruption
There are several alternative classifications of corruption. An important and first distinction is
between public and private corruption. Public corruption happens when an elected politician or a civil
servant obtains additional, personal income or benefits in exchange for giving a company or individual a
good (e.g., a contract, a permit…) or preventing a bad (e.g., compliance with regulation, payment of
taxes…). Private corruption happens when the manager of a company or organization (e.g., non-
governmental organization, non-for-profit entity, international organization…) obtains additional, personal
income or benefits in exchange for giving another company or individual a benefit (e.g., the purchasing
manager buys supplies from a particular company only after receiving a personal gift). Although important,
private corruption tends to be analyzed in the realm of white collar crime, along with offenses such as
corporate fraud, securities and commodities fraud, intellectual property theft, piracy, market manipulation,
mass marketing fraud, money laundering, etc… (FBI, 2015; see a review of white-collar crime in Pontell
& Geis, 2007 and a discussion of private corruption in Argandona, 2003). In the rest of this article I will
focus on public corruption, but the arguments can be easily adapted to the study of private corruption.
Within public corruption, a common classification of corruption is the distinction between petty
and grand corruption (Elliot, 1997). Petty corruption happens when government officials require the
payment of small gifts in order to do their job in a timely manner, whereas grand corruption happens when

3
government officials or politicians give a company a benefit only if the company pays a bribe. In the first
case, which is also known as grease payments, the company is merely accelerating an event which would
happen anyway, whereas in the second case the company is ensuring than an event happens when it would
otherwise not. Another important classification is the distinction between pervasive and arbitrary corruption
(Rodriguez, Uhlenbruck & Eden, 2005). Pervasive corruption happens when the manager faces a request
for a bribe every time he or she has to deal with government officials, whereas arbitrary corruption happens
when the manager faces uncertainty regarding the existence and type of a bribe when she or he interacts
with government officials. A third classification is the separation between organized and disorganized
corruption (Shleifer & Vishny, 1993). Organized corruption happens when there is coordination among the
government officials who request a bribe and once the manager has paid a bribe he or she will not be asked
for additional payments, whereas disorganized corruption happens when there is no coordination and the
payment of a bribe to one government official does not prevent another government official from asking
for an additional bribe for the same service. A fourth classification is based on the impact on the
government, where one distinguishes between corruption with theft, which happens when the government
official keeps the bribe as well as the payment to the government (i.e. permit fees, taxes), and corruption
without theft, which happens when the government official only keeps the bribe and transfers the payment
to the government. A final classification of corruption is the distinction between corruption to deviate from
the application of rules or laws, where the payment of the bribe is done to ensure that current regulation is
applied differently from its original intention, and corruption to change existing rules or laws, where the
payment of the bribe is done to replace current rules with new ones.
Although academic studies tend to classify corruption into several types, it is not always clear that
this can be done consistently across countries, given that there are important cultural differences in how
corruption is viewed. These differences across countries are partly reflected in the variety of metaphors
used to refer to corruption (Tillen & Delman, 2010): In some cases the terms refer to food and drink,
implying politeness and hospitality, like pot-de-vin (a glass of wine) in France, gasosa (soft drink) in
Angola, mordida (a bite) in Mexico, ashaan ash-shay (something for your tea) in Egypt, or finjaan ‘ahwa
(a cup of coffee) in Syria. In some countries the terms used try to diminish its importance, such as spintarella
(a little push) in Italy, fakelaki (a little envelope) in Greece, or kitu kidogo (small things) in Kenya. In other
countries the terms reflect bribery’s function as facilitator of relationships, with for example kenopenz (oil
money) in Hungary, spicken (to lard) in Germany, or grease money in the US. In other countries the terms
used reflect the hidden and illegal nature, such as backhander in the US and India, pod stolom (under the
table) in Slovakia; noemul (giving goods in secret), gum eun don (black money) in Korea; or kuroi kiri
(black mist) in Japan. Finally, in some countries the terms used reflect holiday gift exchanges, like ttokkap
(rice cake expenses, small gifts of cash in envelopes during major holidays) in Korea; or hong bao (red
envelopes containing cash gifts) or “enhanced” moon cakes (fall festival sticky rice cakes) in China; this
latter conceptualization especially highlights the difficulty of identifying corruption, because what is
considered an acceptable form of social exchanges in one country can easily be viewed as bribery in another.
Suggestions for future research. This separation of different types of corruption is important not
only to provide depth to the concept, but also because it has important implications for studies of corruption.
For example, the US Foreign Corrupt Practices Act allows the payment of bribes for petty corruption
abroad, which are called grease payments and are not prosecuted, whereas it penalizes the payment of bribes
for grand corruption (Cuervo-Cazurra, 2008a); hence, future studies analyzing the relationship between
corruption and firm actions can separate between these two types and study their different impact on firm
actions, given that the first one does not carry legal implications. Another example is how companies invest
differently in the face of pervasive and arbitrary corruption (Cuervo-Cazurra, 2008a; Rodriguez, Uhlenbruk
& Eden, 2005). Future studies can continue with the analysis of the different types of corruption, how they
create different challenges for the firm and how firms manage them differently. Additionally, future studies
could analyze the differences in perception of what is considered corruption across countries, since what is
perceived as bribery in one location may be an accepted norm of behavior in another, and thus how
subsidiaries of multinational firms would face a challenge in managing the conflict in the perception of the
same action across host countries.

4
2.3. Measures of corruption
Because of its illegal nature, corruption is notoriously difficult to measure (UNDP, 2008, provides
an overview of measures of corruption). The first challenge is that people involved in a corrupt relationship
are not likely to admit it. Few managers are forthcoming in revealing that they have paid a bribe to get a
contract or expedite a procedure, and few government officials are forthcoming in revealing that they have
received money to advance the objectives of a company. It is not only that corruption is illegal and thus the
people involved in it will not reveal their participation, but also that it is not socially acceptable to
acknowledge that one has paid or received a bribe. Even in countries in which the probability of prosecution
is minimal, people involved in a corrupt relationship will rarely acknowledge it and will hide the payment
of bribes. Jeong & Weiner (2012) find a limited relationship between the corruption perception index at the
country level and the payment of bribes in the United Nations oil-for-food program implemented in Iraq,
while Jensen, Li & Rahman (2010) find that firms in countries with less press freedom are less likely to
answer surveys of corruption.
A second measurement challenge is that measures of corruption tend to reflect only one side of the
story, the payment of the bribe, rather than both sides, the payment and the reception of the bribe. Measures
of corruption usually ask individuals whether they have paid a bribe and the amounts paid (Transparency
International, 2014; World Bank, 2015), implicitly assuming that the government official is the one who
demands the bribe from the manager or individual, who is then unable or unwilling not to comply. However,
in some cases it may be the manager who is not only willing but rather initiates the payment of the bribe to
the government official to get a benefit such as a contract or a way around a regulation. As a result, for
example, Olken (2009) finds that for the same project, the reported bribes paid by villagers and received by
government officials did not match, and there were biases in the perceptions of corruption.
A third measurement challenge is that it is not always clear what a bribe is and how to separate it
from what may be considered normal business expenses or appreciation gifts, or culturally acceptable favors
(Puffer, McCarthy & Peng, 2013). For example, inviting a government official to a meal or a celebration
may be considered an attempt to bribe by some, and merely a normal way of conducting business by
another; or the exchange of gifts during holidays can be viewed as an appropriate way of maintaining a
network of relationship by some, and an attempt to obtain the favor of government officials by another.
One outcome of the challenges in measuring corruption is the existence of multiple alternative
measures. These can be separated into two groups by their level of analysis. On the one hand, we have
datasets with measures at the country level. The most commonly used ones are indicators of the perceived
level of corruption at the country level, which aggregate information from multiple surveys into a single
indicator for the country, are provided by Transparency International and by the World Bank. Since 1995,
Transparency International, a German non-governmental organization, has ranked countries in its
Corruption Perceptions Index by the level of perceived corruption, using an indicator that ranges from 0
(high corruption) to 100 (low) (Transparency International, 2014). Since 1996, The World Bank has ranked
countries by the Control of Corruption using a measure that runs from -2.5 (low control of corruption) to
2.5 (high) (World Bank, 2013). Other sources of data on corruption at the country level are the International
Country Risk Guide of the Political Risk Services Group, the Global Competitiveness Index of the World
Economic Forum, and the Global Integrity Index (UNDP, 2008, provides a full list of alternative indices).
On the other hand, we have datasets with measures at the individual or company level. Two
commonly used ones are the surveys done by Transparency International and the World Bank, which
provide multiple dimensions of the respondents’ direct experience with bribery. Transparency
International’s Global Corruption Barometer has questions on individuals’ view of corruption, their direct
experience with bribery in eight services, the effectiveness of the control of corruption by the government,
and their willingness to fight corruption (Transparency International, 2013). The World Bank’s Enterprise
Survey contains questions on bribery incidence, bribery depth, percentage of firms expected to give gifts to
secure contracts and the value of these gifts, and percentage of firms expected to give gifts in interactions
with the state to get licenses, permits, utility connections, etc. (World Bank, 2015). There are other datasets
at the firm level such as one analyzing firms in Uganda (Svensson, 2003), or another analyzing the
transactions of the oil-for-food program ran by the United Nations (Jeong & Weiner, 2012).

5
 An illustration of the challenges in measuring corruption is the wide differences in the ranking of
countries by the level of corruption across measures. Table 1 presents the ranking of the top and bottom
countries using four alternative measures: two that aggregate information from multiple surveys
(Transparency International’s Corruption Perceptions Index and the World Bank’s Control of Corruption),
and two that ask individuals and managers about their experience with corruption (Transparency
International’s Global Corruption Barometer and the World Bank’s Enterprise Surveys). Although the
measures derived from the aggregation of surveys provide similar rankings of the top countries, there are
significant differences in the countries at the bottom. However, the most remarkable differences appear in
the comparison with the measures coming from surveys of individuals or firms, which provide very
different rankings of both top and bottom countries. This suggests the need for doing robustness tests with
alternative measures to ensure that the findings of studies are not driven by the particular measures used.
*** Insert Table 1 about here ***
Suggestions for future research. The challenge of measuring corruption offers interesting
opportunities to contribute to the literature: analyzing differences between measures and perceptions,
analyzing different aspects of corruption, and analyzing what is considered a bribe across countries. The
first one is exploring differences between perceptions and actual traditional measures of corruption. In this
line of work, Jeong & Weiner (2012) use the UN food-for-oil scandal to get data on the bribes paid,
interestingly finding little relationship with the perceptions of corruption. Another suggestion is to design
studies to measure the likelihood of bribing by including sets of questions that ask about bribery in different
ways, or by having experiments in which some firms are asked about corruption and others are not,
analyzing reasons for the differences.
The second one is going deeper into the concept of corruption and analyzing various dimensions
of corruption. Firm-level surveys like the World Bank’s Enterprise Survey provide information on the
payments requested by different providers of public services such as the police, utilities, and judges. This
can provide a different picture from the one gained using aggregate data, helping to understand not only
how different types of corruption affect the firm, as done on some occasions (Cuervo-Cazurra, 2008a;
Rodriguez, Uhlenbruk & Eden, 2005), but also how particular firm characteristics may lead to being asked
for bribes from different providers, and whether there are differences between subsidiaries of foreign firms,
which can move out of a country, and domestic firms, which are less likely to move out and thus are hostage
to bribe requests.
The third one is studying what is considered to be a bribe across countries, which affects the
likelihood of reporting bribery. Most studies assume that a bribe is understood the same way across
countries, but there can be situations in which payments to government officials can be a normal way of
interacting and thus not be considered a bribe (e.g., in the US it is legal to pay politicians as part of lobbying
efforts, but this is illegal in other countries). Thus, although there are differences across countries in the
likelihood of responding to questions about bribery (Jensen, Li & Rahman, 2010), some of these differences
may be arising from differences in understanding the concept of a bribe, which future studies could explore
in more detail.
2.4. Causes of corruption
Studies of the causes of corruption have discussed several country-level characteristics that are
associated with higher levels of corruption in the country (Beets, 2005; Martin et al., 2007; see reviews in
Lambsdorff, 2006; Mauro, 1998b), such as a culture of arms-length relationships (Tanzi, 1994), ethnic
diversity (Shleifer & Vishny, 1993), ethnolinguistic diversity (Mauro, 1995), cultural dimensions (Zheng
et al., 2013), and foreign direct investment (Kwok & Tadesse, 2006; Robertson & Watson, 2004). However,
these studies of the institutional and cultural norms that are associated with corruption are merely reflecting
the conditions under which bribes can be demanded or offered with more or less impunity (which I discuss
in more detail in the study of controls of corruption below). The causes of corruption lay at the individual
level with the incentives of government officials to ask for a bribe and of managers to provide one. Hence,
I suggest separating the drivers of the demand for a bribe by the government official from the drivers of the
supply of a bribe by the manager of a company, because the incentives for these two groups differ
significantly. Much of the literature on the causes of corruption focuses on the drivers of the supply of

6
bribes. This is partly because databases tend to ask managers or individuals for the bribes they have paid to
government officials (e.g. Transparency International, 2013; World Bank, 2015) rather than ask
government officials for the bribes they have been offered; and partly because there is an assumption that
managers are forced to pay bribes to government officials rather than volunteering to do so, an assumption
that may not be correct in all instances.
On the one hand, studies of the demand for bribes analyze the incentives for government officials
to make such demand. A government official is able to demand a bribe from a company because he or she
has discretion, i.e., monopoly power (Shleifer & Vishny, 1993), over something that the company wants to
have (a “good” such as the processing of permits or the allocation of a contract) or over something that the
company wants to avoid (a “bad” such as the payment of taxes or fees, or compliance with regulations).
Only in situations of monopoly power over the decision is the government official able to demand a bribe;
if there are several government officials who can make the decision, the manager can ask another
government official without paying a bribe. Additionally, the decision has little cost to the government
official, because the cost is borne by the government who is the owner of the good or the bad and does not
receive payment for them. Drivers of a demand for a bribe vary by the position of the government official:
Government officials at high positions may demand bribes to enrich themselves, or in some cases to repay
the expenses from obtaining the position in government, while government officials at low positions may
demand bribes to complement their meager salaries. Thus, studies find that higher salaries are associated
with lower corruption (Goel & Rich, 1989; Van Rijckeghema & Weder, 2001).
On the other hand, studies of the supply of bribes by companies analyze the incentives for managers
to offer a bribe. Managers have an incentive to supply bribes to government officials (Jeong & Weiner,
2012) to obtain benefits for the company, such as the company being awarded a contract without a
competitive tender or the company not having to comply with regulations that apply to other firms. The
bribe can not only help the company achieve its objectives, but also can help the manager advance in his or
her career because the operation he or she manages is more successful. Moreover, the cost of the bribe is in
general not born directly by the manager but by the company, as the manager uses company rather than
personal funds to pay the bribe. Studies have identified the characteristics of the companies associated with
the payment of bribes, such as their ownership, market orientation, and capabilities (Luo & Han, 2009), and
the differences in the bribes paid by firms depending not only on their ability to pay a bribe, but also on
their ability to refuse the payment of a bribe (Svensson, 2003).
Suggestions for future research. The separation of incentives for government officials and for
managers can lead to a host of future research that analyzes in more detail the differences in the willingness
and ability of these two actors to ask for or provide a bribe, as well as the ability of both actors to reject the
reception or payment of a bribe. Hence, future studies could analyze the characteristics of government
officials that induce them to ask for a bribe, going beyond their salary and analyzing their position and
maybe even personality traits or previous experience. Others studies can analyze the ability of government
officials to reject an offer for a bribe. In parallel, studies can analyze the characteristics of managers that
induce them to offer a bribe and or give them the ability to reject a request for a bribe, extending previous
studies (Luo & Han, 2009; Svensson, 2003). Moreover, one could explore the incentives to offer a bribe
for firms that depend on sales to the government (e.g., infrastructure, defense...) versus those that can
operate without selling to the government (e.g., consumer goods…).
Additionally, future studies can analyze how the country of origin of the managers affects their
ability to offer or willingness to pay a bribe in a host country, taking into account that there is a self-selection
of companies that choose to invest in a corrupt country. For example, although one could assume that
managers from corrupt host countries are more willing to bribe abroad, the relationship is not always clear;
Hong Kong appears to have more controls over corruption than Brazil (Transparency International, 2014),
but Hong Kong managers are perceived to be more likely to pay bribes than Brazilian ones (Transparency
International, 2011).
A final suggestion is to study the interesting, and rarely analyzed in academic studies, methods
used to pay bribes. Such studies can provide not only better insights on the mechanisms of corruption, but
also a better understanding on the motivations of government officials and managers who engage in bribery.

7
Although most studies assume that bribes are paid in cash, there are many alternative ways of providing a
private benefit, such as securing a position in an exclusive nursery school (Gasparino, 2002), which can
provide further insights into the drivers of asking for or offering a bribe.
2.5. Consequences of corruption
Corruption has important consequences for the country and firms. At the country level, the usual
view is that corruption has a negative impact (Bardhan, 1997; for reviews see again Lambsdorff, 2006;
Mauro, 1998b; as well as Campos, Dimova & Saleh, 2010; Wei, 1999). Thus, countries with higher levels
of corruption tend to also be less developed (Mauro, 1995, 1998), have lower levels of investment
(Lambsdorff, 2003), have lower exports (Lee & Weng, 2013) that go to different destinations depending
on the corruption levels (Lambsdorff, 1998), and have more non-performing bank loans (Park, 2012). They
also tend to have lower levels of foreign direct investment (Habib & Zurawicki, 2002; Wei, 2000),
especially from countries with laws against bribery abroad but not from corrupt countries (Cuervo-Cazurra,
2006), although the strength of the relationship between foreign direct investment and corruption varies
with the type of foreign investment (Brouthers, Gao & McNicol, 2008).
At the company level, there are two competing views of the consequences of corruption: a negative
one that sees corruption as “sand in the wheels of commerce” that limits the ability of the company to
operate efficiently, and a positive one that sees corruption as “grease in the wheels of commerce” that
enables the company to operate better. This distinction, which does not take into account ethical, moral and
legal considerations (see an overview in Noonan, 1984), appears to reflect who drives demand for the bribe:
corruption is usually seen as sand when it is the government official who demands the bribe, but it is usually
seen as grease when it is the manager who offers to pay a bribe to get something that helps the company.
This separation by actor is important but rarely reflected in the literature.
On the one hand, the view of corruption as sand highlights the increase in costs and uncertainty that
corruption brings. Corruption and the payment of bribes become similar to an additional tax on companies
(Wei, 2000), which reduces firm investment (Voyer & Beamish, 2004) and leads companies to invest using
low investment methods such as non-equity methods and joint ventures (Javorcik & Wei, 2009; Uhlenbruk,
Rodriguez & Eden, 2006). Corruption leads to an increase in costs because the company not only must pay
bribes to government officials, but also must devote managerial and employee time to managing
relationships with corrupt government officials (Kaufmann, 1997). Companies in more corrupt
environments are less likely to be assertive with and cooperate with the government (Luo, 2006). Corruption
increases uncertainty of operation in the country, because the company does not know whether it will be
asked for another bribe and whether the payment of the bribe will result in the delivery of the promised
benefits (Rodriguez, Uhlenbruck & Eden, 2005; Uhlenbruck, Rodriguez & Eden, 2006; Wei, 1997).
Corruption also leads to lower levels of firm growth (Fisman & Svensson, 2007).
On the other hand, the view of corruption as grease highlights the benefit for the firm in reducing
transaction costs and expediting procedures. When companies operate in countries with burdensome and
unclear regulations, the payment of a bribe ensures that bureaucratic procedures are fulfilled in a timely
manner (Huntington, 1968; Lui, 1985). The payment of bribes introduces competition and expediency in
the issuance of permits, because investors that value their time more will be more willing to pay bribes and
government officials will work faster to process the paperwork to serve as many customers as are willing
to pay a bribe (Lui, 1985). Political connections can be very useful for the success of the firm, especially in
corrupt environments (Chen, Ding & Kim, 2010), although they are dependent on the continuation of the
relationship (Fisman, 2001). However, there is also the possibility that corruption has a curvilinear impact
on foreign investments (Petrou & Thanos, 2014). Despite these arguments, it appears that the view of
corruption as grease does not have much empirical support, unlike the view of corruption as sand (Aidt,
2009).
Suggestions for future research. Future research can continue analyzing the consequences of
corruption, especially to untangle the conditions under which the manager may find it profitable or not to
bribe. This analysis requires the inclusion not only of the potential benefits in terms of increases in sales vs
the actual cost of the bribe, but also of the potential costs of being criminally prosecuted, which I discuss
in the next section.

8
 Additionally, and linking to the previous discussion on types of corruption, one could analyze how
different types of corruption are associated with the performance of the company. This might help
disentangle the debate on the benefits of bribery by, for example, finding that petty corruption increases the
cost of operation whereas grand corruption increases the revenues for the company. Additionally, it may be
interesting to analyze the conditions under which a company can profit from bribery depending on the
conditions of the host country; for example, studying the conditions under which multinationals can pass
the additional costs of the bribes on to consumers in the form of higher prices.
A third suggestion for future research is to analyze differences in the short-term and long-term
consequences of corruption. Some of the analyses of the benefits of bribing reflect a short-term vision
comparing the financial cost of paying a bribe to government officials against the direct benefits to the
company in terms of an increase in revenues or profits. A more long-term analysis would require taking
into account that government officials may continue demanding bribes over time, and that if the bribes are
caught, this will end the career of the manager with a prison sentence and fine. Of course, all of this is
contingent on the effectiveness of the controls of corruption, which I discuss now.
2.6. Controls of corruption
Corruption is illegal and has negative consequences for the country and companies in general, even
if some individual companies may benefit from it. This has led to the emergence of a large set of studies
analyzing the best ways for controlling corruption (see Beets, 2005; Klitgaard, 1988; Tanzi, 1998, for a
discussion of the topic, and articles in the special issue edited by Ashforth et al., 2008).
Although common perceptions are that some cultures are more prone to bribery than others and
that emerging markets are riddled with corruption, the reality is that corruption exists everywhere, because
the incentives to engage in a corrupt relationship exist for both government officials and managers of
companies regardless of country. The perceptions rather reflect weaknesses in the control of corruption,
such as whether laws are enforced by courts without interference from politicians and by judges that are
impartial, efficient, and not amenable to being influenced. There are numerous examples of countries with
very similar historical and cultural traditions but with very different level of corruption that contradict this
view. For example, North and South Korea have the same cultural background but are polar opposites in
the control of bribery; China, Taiwan, Hong Kong, and Singapore share a cultural background but have
very different levels of corruption; and Chile, Uruguay, and Argentina have similar historical and cultural
traditions and income levels, but very different levels of corruption. Moreover, the level of corruption
changes over time, with highly corrupt countries reforming and reducing it, and countries relatively free of
corruption becoming corrupt (Tanzi, 1998). The institutions controlling corruption, rather than the culture,
determine the prevalence of bribery.
There are different ways of classifying the controls of corruption, which can be used to provide
depth to the study of corruption in international business. One classification is the separation of controls
that aim to reduce the demand for bribes by government officials from controls that try to reduce the supply
of bribes by managers. Another classification is based on who is aiming to control corruption: the
government, or the company. A third classification is based on the power of the controls of corruption: legal
powers, or normative powers such as voluntary norms and codes of conduct. A final classification is by the
solutions to two conditions that facilitate corruption: reducing the opportunity for engaging in corruption,
or reducing the incentive for engaging in corruption.
Controls to reduce the demand for bribes by government officials operate at the government level,
where the severity of punishment and the probability of being convicted act as deterrents on corruption
(Goel & Rich, 1989). There are several steps to reduce the demand for bribes (Potter & Tavits, 2011;
Recanatini, 2011). First, the government can limit the ability of government officials to demand a bribe by
reducing discretion over decisions, decentralizing decision making, or increasing the transparency of
government officials’ behavior and decisions. Second, the government can increase the probability of being
caught by creating hotlines where citizens can disclose who has asked for a bribe, by establishing
independent corruption investigators with enough resources and power to initiate investigations against
corrupt officials at all levels, and by encouraging a free press that discovers bribery via investigative
journalism (Recanatini, 2011). Third, the government can alter the benefit-cost balance of asking for a bribe

9
by increasing punishments, extending jail time, and increasing fines, including the repayment of the money
received as bribes. Finally, all of this requires not only reforms on the part of the government, but also
reforms in the judicial system so that judges implement the laws and process cases efficiently and
impartially.
Controls to reduce the supply of bribes by managers operate not only at the company level but also
at the country level. Controls at the company level encourage managers to avoid thinking of bribing a
government official as an appropriate action. Doh et al. (2003) provide a detailed discussion of company
strategies for dealing with corruption. First, the company can specify behavior that is not acceptable by
implementing codes of conduct that clarify that paying bribes is not allowed and by training employees to
spot situations that could be viewed as bribery. Examples of codes of conduct that companies can implement
are available at Transparency International, the Organization for Economic Cooperation and
Development’s Principles for Multinational Enterprises, or the United Nations’ Global Compact. Second,
the company can implement controls that limit employees’ ability to pay by requiring a supervisor’s
approval for payments above particular levels, by prohibiting payments to government officials or political
parties, or by supervising payments to entities that could create problems such as charities run by
government officials. The company can also use certifications to signal higher quality in corrupt locations
(Montiel, Husted & Christmann, 2012).
At the government level, controls to reduce the supply of bribes exist in the form of laws against
bribery abroad. The logic of these laws is that some host countries have ineffective prosecution of bribery,
and thus effective prosecution of bribery has to be done in home countries with better institutions (See
Cuervo-Cazurra, 2006, 2008b for a discussion of laws against bribery abroad and their impact on foreign
direct investment). The first country to implement these laws was the US, which passed the Foreign Corrupt
Practices Act in 1977 that required companies to maintain accurate records, create effective internal
accounting control systems, and prohibited the payment of bribes to foreign officials, politicians, and
political candidates (US Congress, 1977). The law did not prohibit “grease payments” to expedite
procedures despite such payments being banned in the US, because these were considered an accepted
practice in other countries. In 1998, the FCPA was revised, increasing penalties but reducing standards as
managers were no longer required to have ‘reason to know’ a bribe had been paid but actually had to ‘know’
that are a bribe had been paid (US Congress, 1999). The FCPA applies to US firms and companies quoted
in US capital markets, but has been used against firms that use the US financial system as well. In 1997,
member countries of the OECD and five other countries signed the Convention on Combating Bribery of
Foreign Public Officials in International Business Transactions, ratified it in 1999, and implemented laws
that prohibit the payment of bribes to government officials of foreign countries as well as officials of
international organizations (OECD, 1997). The implementation of the Convention is reviewed periodically
to pressure governments to enforce laws effectively. These laws have had a limited impact, partly because
of the difficulty in investigating cross-border cases and partly because some governments are reticent to
constrain the behavior of their firms abroad. The initial implementation of the FCPA appeared to have a
weak influence on foreign investments by US companies (Hines, 1995; Kaikati & Label, 1980), but after
the passage of the OECD Convention, foreign investors from countries that had such laws against bribery
abroad, including the US, were less likely to invest in corrupt countries (Cuervo-Cazurra, 2008).
Suggestions for future research. The literature has mostly focused on understanding the
effectiveness of country-level controls on bribery, paying less attention to the effectiveness of company-
level controls. Both are needed to establish controls over bribery by constraining both the supply and the
demand of bribes. Thus, at the country level one can analyze not only the effectiveness of laws against
bribery abroad (Cuervo-Cazurra, 2008b), but also the role of complementary institutions such as
independent anti-corruption agencies and the press to investigate and discover bribery cases, as well as the
effectiveness and independence of judges in investigating and punishing bribery abroad. In this area, it can
be interesting to connect the country to the firm level and analyze the likelihood that particular types of
companies, such as state-owned companies, companies operating in what are consider strategic industries,
or companies that are considered national champions, may be able to get away with bribery abroad because
of political considerations in the home country against prosecuting such companies.

10
 At the firm level it is important to analyze the effectiveness of controls in companies against
bribery. It can be interesting to analyze how companies can establish effective controls to avoid corruption
by managers of the local operation and how they deal with corruption cases effectively. For example, in the
case of the US retailer Walmart in Mexico, local managers bribed to get permissions to builds stores but
higher ups covered up the bribes when they learned about them (Barstow, 2012; Barstow & von Bertrab,
2012). Hence, the effectiveness of voluntary codes of conduct may be questioned, especially when there
are clear benefits of bribing government officials, or when the likelihood of being prosecuted in a corrupt
host country is low.
3. CORRUPTION AS A LABORATORY FOR EXTENDING THEORIES OF THE FIRM
I now explain how corruption can be used as a laboratory for extending existing theories of the
firm, because the criminal and unethical nature of corruption challenges some of the assumptions of the
theories. I select five theories (agency theory, transaction costs economics, the resource-based view,
resource dependence, and neo-institutional theory) because they are well-equipped to analyze the
relationships between firms and government, as done in the analysis of state-owned multinationals (Cuervo-
Cazurra et al., 2014). Other researchers can follow these examples and extend their preferred theory by
analyzing corruption. Table 2 summarizes the theories and extensions.
***Insert Table 2 about here***
3.1. Agency theory
Agency theory studies the management of agency relationships, or relationships between two
parties where one of these, the agent, acts on behalf of or as a representative of the other, the principal, in
making a decision (Ross, 1973). The principal gives the agent incentives and creates controls to ensure that
the agent selects actions that enable the principal to achieve her or his objectives (Holmstrom, 1979; Jensen
& Meckling, 1976). These incentives and controls are needed because there are differences in the objectives
and risk attitudes between principal and agent. The existence of information asymmetries and imperfect
contracting creates two types of agency problems (Besley & McLaren, 1993): adverse selection, when the
information asymmetries between agent and principal appear before they establish a contract; and moral
hazard, when information asymmetries between agent and principal appear after they establish a contract.
In addition to these problems, in international business, the existence of higher levels of information
asymmetries and difficulties in the ability of the firm to contract across borders result in additional agency
costs.
Analyzing corruption from agency theory has a long tradition in the literature (Bac, 1996, 2001;
Besley & McLaren, 1993; Mishra, 2006; Rose-Ackerman, 1999; see Cuervo-Cazurra, 2014 for a detailed
discussion of the application of agency theory to the study of corruption). The usual agency view is that a
government official is the agent and citizens or the superiors of the government official are the principals
who need to design incentives and controls to prevent the government official from asking for bribes.
Extending agency theory: Designing controls in unethical agency relationships. Going beyond
this traditional relationship, I suggest extending agency theory by analyzing two other agency relationships:
one in which managers are the principals and government officials are the agents in an unethical agency
relationship, and another in which managers at headquarters and managers in the host country engage in an
unethical agency relationship.
One extension of agency theory is interpreting the bribery relationship between the host country
manager and the government official as an agency relationship. The manager is the principal and tasks a
government official as agent to provide the firm with a benefit that is within her or his control in exchange
for a bribe. The manager faces an unusual adverse selection challenge of finding a corrupt government
official who can be bribed, and avoiding clean government officials who may denounce the manager if they
are offered a bribe. However, in addition to finding a government official who can be bribed, the manager
needs to find one who will fulfill her or his end of the bargain once he or she has received the bribe. Unlike
traditional agency relationships in which the manager can use contracts and controls to ensure that the agent
does not misbehave, in a bribery relationship the manager is unable to write a contract specifying the
relationship because of the need to maintain the opacity of the transaction and avoid a paper trail, and cannot
use the court system to solve disagreements with the agent over his or her misbehavior because bribery is

11
illegal. Thus, an illegal agency relationship needs to be based on mutual trust, going against the usual view
of agency theory that the divergence of interests between principals and managers and the possibility of
opportunism requires principals to establish tight controls over agents. Future research can explore this
challenge to the usual assumptions of the theory in more detail by analyzing the mechanisms that enable
such illegal agency relationship to work.
Another extension of agency theory is the study of agency relationships within the multinational as
it engages in bribery abroad. The analysis of the relationship between managers at headquarters and
managers in the host country as an agency relationship is well established (e.g., Roth & O’Donnell, 1996);
a similar logic can be applied to other relationships between headquarters and host country managers such
as those of joint ventures or partnerships (Roy & Oliver, 2009). The usual view of bribery within the
multinational is one in which managers at headquarter, the principals, are honest but local managers, the
agents, are willing to bribe government officials to improve the success of the operation they run and their
career prospects. Thus, managers at headquarters establish controls and incentives to deter host country
managers from engaging in bribery, ensuring not only that the agents achieve the objectives of the
principals, but also that they achieve these objectives within the law.
However, in contrast to this usual view, there may be situations in which managers at headquarters
are interested in engaging in bribery while host country managers are not. In this situation, the adverse
selection challenge is to find an honest agent who will engage in dishonest behavior abroad. When pressured
to engage in bribery abroad, the ethical host country manager is subject to a conflict of interests, as the
objectives of the principals are ethically opposed to his or her objectives. Thus, the agency model can be
enriched to discuss the achievement of unethical objectives and how agents can reconcile their ethics with
those of the principals. Managers at headquarters may decide to select host country managers who do not
have an ethical conflict and are willing to bribe abroad. However, these corrupt agents might not only
engage in corruption and pay bribes to government officials in the host country, but also pursue their own
objectives and take a portion of the bribes paid to government officials. In such cases, managers at
headquarters will face difficulties in disciplining misbehaving agents, because these agents are engaging in
illegal behavior which has been mandated or condoned by the principals. Future research can analyze how
managers at headquarters design incentives and controls so that agents behave honestly with headquarters
managers while engaging in illegal and dishonest behavior in the host country.
3.2. Transaction cost economics
Transaction cost economics explains firm behavior based on the cost of conducting economic
transactions among actors. Transaction costs appear because there are information asymmetries and
imperfect contracting coupled with asset specificity and opportunism (Williamson, 1975, 1985).
Transaction costs can be identified by analyzing the specificity of assets in an economic relationship and
the secondary use of such assets, and the ability to create contracts that prevent opportunism in situations
of imperfect and asymmetric information. In international business, firms have to deal not only with the
specific costs of the transaction, but also with differences across countries in the institutions that facilitate
contracting and the enforcement of contracts (North, 1990). As a result, firms may internalize transactions
differently across countries (Anderson & Gatignon, 1986; Buckley & Casson, 1976).
The usual view of bribery in transaction cost economics is that it increases the transaction costs of
operating in the country, because it results in additional costs and uncertainty in the relationships between
the firm and the government. Operating in a corrupt country increases the costs of operation, because the
firm has to pay the cost of the bribe to get government services and devote managerial time and attention
to dealing with corrupt government officials (Kauffman, 1997). Additionally, a manager faces additional
uncertainty in his or her relationship with the government when there is widespread bribery in the host
country (Rodriguez, Uhlenbruck & Eden, 2006), because he or she cannot know whether the government
official that asks for the bribe is the right person to bribe, or whether another government official will appear
and ask for another bribe after the manager has already paid one to the first government official.
Additionally, the manager cannot be sure whether the government official will fulfill his or her side of the
bargain once he has been paid a bribe, because the there is no legal way to enforce an implicit bribery
contract in the courts. In developing countries, the company may internalize services that the government

12
usually provides, such a security and safety, healthcare, or worker education (Fisman & Khanna, 2004);
one reason may be to reduce opportunism and bribery demands by government officials.
Extending transaction cost economics: Illegal transaction cost minimization. An alternative view
that extends transaction cost economics, is to conceptualize the payment of bribes as a mechanism for
reducing transaction costs, even if such minimization of transaction costs is illegal. Hence, the manager
may face situations in which it is easier and cheaper to pay a bribe to government officials to get a permit
or inspection passed rather than comply with all the requirements that are on the books. Additionally, paying
a bribe reduces the uncertainty of knowing whether the company is complying adequately with a regulation
the way it should be when the regulation is too complicated and its application is unclear. Future research
can analyze the conditions under which it is cheaper to minimize costs by paying a bribe, even if this is
illegal. However, one challenge of paying a bribe is that the government official may not abide by the
(implicit) bribery contract. One solution may be to align the incentive of the government official with those
of the company, giving the leader of the country or his or her family shares or payments contingent on the
success of the company, so that the government official has transaction specific assets in his or her
relationship with the firm that reduce the threat of opportunism in the interactions with the company; this
is a topic that future research could analyze in more detail. Making the government official part of the
company, i.e., giving the official assets that are specific to the relationships with the firm, changes the
relationship between the company and the government from one in which the government official is
extracting a maximum of bribes independent of the success of the company, to one in which the extraction
of bribes depends of the continued success of companies, i.e., changing the government official from being
a roving bandit to becoming a stationary bandit (Olson, 1993). However, sudden changes in the government
may be detrimental to the firm (Fisman, 2001), because the value of such relationship-specific assets
depreciates.
3.3. Resource-based view
The resource-based view (RBV) studies how firms can create distinctive resources and associated
capabilities to serve customers better than their competitors (Barney, 1991; Penrose, 1959). A company
creates unique resources and protects them from imitation by competitors, using complexity, causal
ambiguity, or legal means (Barney, 1991; Dierickx & Cool, 1989). It uses these resources and capabilities
to obtain higher returns by expanding scale, diversifying into other industries, or entering foreign countries.
In international business, the challenge of the manager is to identify and transfer the sources of advantage
across borders and ensure they maintain the ability to provide an advantage to the company in the face of
different customers, competitors, and institutions that protect sources of advantage (Hu, 1995; Tallman &
Yip, 2001).
When competing abroad, the company can use not only competitive but also institutional resources
that it has developed to operate within the institutions of the home country (Peng, 2002), which in some
cases can be the source of an advantage (Martin, 2014). For example, in the least developed countries,
emerging market multinationals have an advantage over their advanced economy competitors that have not
been exposed to weak institutions in their home countries (Cuervo-Cazurra & Genc, 2008).
Extending the resource-based view: Corporate social irresponsibility capability. The study of
corruption can help extend the resource-based view by altering its traditional understanding of sources of
competitive advantage, which have tended to focus on resources that enable the firm to compete in the
industry and provide customers with something not offered by competitors (Barney, 1991; Dierickx & Cool,
1989). By engaging in bribery, the firm can achieve a competitive advantage not because it is the best at
creating a product that satisfies the needs of customers, but because it is the one that is most willing to pay
a bribe to a government official (Lui, 1985). This source of institutional advantage can be termed a corporate
social irresponsibility capability. This conceptualization goes beyond the notion of corporate
irresponsibility arising from the inability of multinationals to manage complexity (Strike, Gao & Bansal,
2006), because the firm is actually developing a capability for engaging in illegal behavior. In contrast to
other sources of institutional advantage (Martin, 2012), the firm is not managing institutions better but
rather bypassing institutions. Thus, the firm builds a corporate social irresponsibility capability by

13
developing an ability to understand who to bribe and how to bribe in a way that is difficult to track down
and prosecute.
The firm may be able to use this capability to achieve an advantage over other firms that are unable
or unwilling to create such a capability when they interact with government officials. Although competitors
that have not developed this corporate social irresponsibility capability can invest in its development, they
have large challenges in imitating it. In addition to the usual protection of capabilities, companies will go
to greater lengths to hide such a capability; the competitor may not be even aware that the company is
deploying a corporate social irresponsibility capability to win business. Moreover, even if the manager has
decided that it is worth investing in the development of this capability, the firm faces the dilemma that it is
developing a capability that can result in criminal prosecution. Unlike with other capabilities, the firm
cannot rely on the help of external providers, such as consultants, to build the corporate social
irresponsibility capability because bribery is illegal. Thus, the selection among the methods of development
of acquisition, alliances, and internal development is narrowed down to internal development not because
the firm wants to ensure that competitors do not copy this capability, as it is the usual argument in favor of
internal development within the resource-based view (Capron & Mitchell, 2012), but because the capability
being developed is illegal and the firm cannot disclose that it is building and using it to external partners.
Future research can investigate in more detail how companies can build a corporate social irresponsibility
capability, protect it from imitation and substitution by competitors, and deploy it across countries.
This capability is of particular use in industries that are highly dependent on the decisions of
government officials, such as those that depend on the government as the main or a very important customer
like defense, utilities, or civil construction. The advantage achieved via corporate social irresponsibility
enhances profitability, because in these industries not only do government officials decide who is awarded
the contract, but also the final consumers (i.e. citizens using the services) are unable to compare the quality
and in many cases the cost of the products, because there are no alternative providers given that the
industries tend to also be subject to local monopolies. Future research can analyze how the characteristics
of the industry in which the firm competes affect the development of a corporate social irresponsibility
capability and the profitability associated with it.
3.4. Resource dependence
Resource dependence theory analyzes power relationships among two parties in which one party is
able to exercise power over the other (ask the other to do something that he or she does not want to do),
because the latter depends on the former for some resources (Pfeffer & Salancik, 1978). To reduce this
dependence, the manager can co-opt those that have power and integrate them within the company, linking
their objectives to those of the firm. As the company expands abroad, it needs to identify and co-opt
companies and entities on which it depends for support to ensure its success in the host country.
A traditional application of resource dependence theory to the analysis of corruption would be to
argue that managers of the host country operation would try to gain the support of government officials for
their operation by providing them with appropriate bribes, given that the foreign company faces a power
imbalance in its relationship with government officials abroad who act as gate keepers for access to the host
country (Casciaro & Piskorski, 2005). However, paying a bribe is a short-term payment for services rather
than a form of co-optation. Thus, a more appropriate way of ensuring the support of government officials
toward the long-term success of the foreign operations may be to make them part of the company, giving
them shares or positions as consultants, thus in effect changing the relationship from one of power
imbalance to one of mutual dependence (Casciaro & Piskorski, 2005).
Extending resource dependence: Ethical power escape. An alternative extension of resource
dependence is the ethical power escape, in which managers of the firm claim to be under the power of home
country government norms and controls in order to limit the power of host country government officials
and their demands for bribes. Different from the usual arguments of resource dependence in which the
objective of the manager is to reduce the dependence of the company on the government, in the case of
corruption the manager is interested in maintaining the dependence on the power of the home country
government in order to reduce the power of the host country government and the requests for bribes. That
way, when asked for a bribe by a host country government official, the manager can claim that the company

14
is constrained in its ability to pay bribes in the host country by ethical codes of conduct and anti-bribery
laws that make the payment of bribes abroad impossible. In this way, managers of the company use the
competing sources of power between the government in the home country and the government in the host
country as a way to avoid paying bribes. Future research can extend these ideas and identify other conditions
under which the manager is able to reduce the power of host country government officials and their demands
for bribes.
3.5. Neo-institutional theory
Neo-institutional theory focuses on understanding how the company can achieve the legitimacy
needed to operate within society. Companies respond to the cognitive, normative, and regulatory pressures
of the environment and imitate practices of other companies that are perceived as legitimate (DiMaggio &
Powell, 1991). Differences in the cognitive, normative, and regulatory pressures across countries create a
conflict for subsidiaries of foreign firms, which have to manage what in some cases are competing pressures
for legitimation from the headquarters and from the host country (Kostova & Zaheer, 1999).
Extending neo-institutional theory: Illegal legitimacy. The analysis of corruption within neo-
institutional theory poses an interesting dilemma because although bribery is illegal, it may be accepted
(i.e., legitimate) in corrupt countries, which creates an additional tension within the theory regarding what
is legitimate. The manager of the foreign company that encounters a request for a bribe in a corrupt country
may feel the pressure to comply with it, because it is an accepted (normative and cognitive) way of doing
business, even if it is not a legitimate (regulatory) way of doing business, because it is illegal (Spencer &
Gomez, 2012). At the same time, compliance with the bribe may create tensions with headquarters about
what can be considered legitimate.
Hence, one extension of the theory that can be analyzed in future research is the existence of
competing demands in the cognitive, normative, and regulatory pressures. Managers may have cognitive
pressures to implement the same type of ethical standards around the world, but face different normative
pressures in what is considered an ethical practice and what is considered a culturally accepted norm of
behavior, even if it is unethical and illegal and goes against regulatory pressures. Additionally, there are
differences in the regulatory pressures regarding bribery and how strongly such regulatory pressures are
enforced around the world; in addition to differences in the enforceability of laws against bribery at home
and in the host country, there are also variations in enforceability of laws against bribery abroad. Thus, in
the case of ethical dilemmas, in addition to the usual discussion of the conflict between home and host
country legitimation practices (Kostova & Zaheer, 1999), future research can analyze differences in the
cognitive, normative, and regulatory pressures regarding what practices are considered to be legitimate or
not, and under which conditions these pressures have more power relative to each other in driving the
behavior of the company.
An additional challenge to the theory is the analysis of the conditions under which a practice
becomes legitimate, which can be studied in more detail in future research. First, the payment of a gift to a
government employee, which may be a legitimate way of establishing relationships and networking in the
host country, may not be a legitimate way to do so in the home country. At the same time, not exchanging
gifts with government officials in the host country may make the foreign company an illegitimate partner
who is not following culturally-accepted practices. Second, a company that comes from a country in which
corruption is an accepted norm of behavior, even if it is illegal, and goes to a country in which corruption
is not legitimate faces a different dilemma. Managers who are used to bribing to get things done may try to
do the same abroad even though such behavior is not legitimate and, additionally, is criminally prosecuted
in the host country. Another interesting extension that future research can analyze is whether exposure to
countries with better controls of corruption would lead home country managers to change their norms of
behavior at home once they are exposed to what would be perceived as superior norms in the host country,
or whether they would just abide by whatever is the accepted practice in the host country without changing
practices elsewhere.
3.6. Integrating the five theories to analyze corruption
In addition to extending each of the five theories, the study of corruption can be used as a laboratory
for integrating them. In Figure 2, I attempt an integration of the five theories by placing them within Figure

15
1 in the areas in which the theories are most applicable; a good theory can explain a large realm of human
behavior, so here I artificially limit their application for illustration purposes. I propose that agency theory
and the resource-dependence theory are better positioned to explain the causes of corruption because they
are mostly concerned with the study of relationships between managers and government officials; that the
resource-based view and neo-institutional theory are better positioned to explain the consequences of
corruption because they are mostly focused on understanding firm behavior in response to competitors; and
that transaction cost economics is best positioned to explain the controls of corruption because it is mostly
focused on designing the governance of economic relationships.
***Insert Figure 2 about here***
Nevertheless, despite being able to position the five theories in the figure, this is still not an
integration but a juxtaposition. To achieve a deep integration, the theories need to have assumptions that
are aligned, something that tends not to be the case across disciplines. For example, the economic tradition
tends to assume that individuals are mostly driven by their own individual desires and incentives and subject
to external constraints, while the sociological tradition tends to assume that individuals are mostly driven
by what is acceptable in the broader society. Thus, for example, integrating the resource-based view and
neo-institutional theory would be challenging because whereas the (economics-based) resource-based
theory tends to assume the divergence and heterogeneity of companies, the (sociology-based) institutional
theory tends to assume the convergence and homogeneity of companies. Hence, despite the calls for
interdisciplinary work (Cheng et al., 2009), I suggest integrating theories that draw from a common
disciplinary background because they share commonalities in their assumptions on human behavior rather
than integrate theories across disciplines.
With this in mind, I propose that future studies can try to provide a comprehensive understanding
of corruption in and across countries in two ways: an economic approach and a sociological approach. First,
building on the economic logic one can analyze the individual incentives of companies and government
officials (using agency theory as an explanation) within the constraints of institutions and controls over
corruption that limit their ability to engage in corrupt transactions (using transaction cost economics) and
discuss the consequences for the company in terms of the achievement of a competitive advantage over
rivals by using corporate social irresponsibility capabilities that are better than those of rivals (as explained
in the resource-based view). Second, using the sociological logic one can analyze power relationships
between managers and government officials and how to reduce the power of government officials over the
company (using resource dependence) within the additional pressures of what is acceptable behavior that
enables the company to achieve legitimacy in the country while complying with regulations and laws (using
neo-institutional theory).
4. MANAGERIAL IMPLICATIONS
Although the present article is focused on providing suggestions for extending research on
corruption, the ideas nevertheless have important implications for managerial practice. First, the framework
in Figure 1 presents an overview of the different aspects of corruption that managers may want to take into
consideration when confronted with it, providing a better understanding of the topic of corruption in
international business by focusing on the impact of corruption at the company level. Second, the review
provides a better understanding of the drivers for engaging in bribery among not only government officials,
but also among managers. Although most of the literature assumes that it is the government official who
drives the demand for bribes, managers also have incentives to offer bribes. Both affect the behavior of the
firm and the controls imposed. Third, the review and extension of theories provide a deeper understanding
of the logic behind actions and how the use of bribery can be conceptualized and explained. Thus, managers
can use bribery to achieve a competitive advantage, or to reduce transaction costs in the host country, or to
design mechanisms to ensure that government officials fulfill their promises, depending on the explanatory
logic they prefer to follow in their decision making.
5. CONCLUSIONS
In this article I analyzed corruption in international business, going beyond the traditional review
of the literature to provide suggestions for future research in two areas: the topic of corruption and theories
of the firm. First, for the topic of corruption, I proposed extending the literature by analyzing the concept,

16
causes, consequences, and controls. Specifically, I suggested analyzing the incentives of the supply and the
demand sides of bribery; the consequences of bribery at the country and firm level, and the implementation
of controls at the country and firm level to reduce both the supply and the demand of bribes. Second, for
theories I proposed using corruption as a laboratory for extending them, as its illegal nature challenging
some of the assumptions of the theories. The wide variation in what is considered bribery and the large
divergence in the enforcement of laws against bribery create the ideal conditions for exploring how
variations across countries affect firm behavior and the potential for extending the theories further. Hence,
I proposed extending agency theory by analyzing the existence of unethical agency relationships; extending
transaction cost economics by analyzing illegal transaction costs minimization; extending the resource-
based view by studying corporate social irresponsibility capability; extending resource dependence by
analyzing the ethical power escape; and extending the neo-institutional theory by studying illegal
legitimacy. Future studies can take the suggestions provided in this article and analyze them in more detail,
helping extend not only our understanding of corruption in international business, but also modifying and
expanding the explanatory power of theories of the firm.
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 Figure 1
Framework for analyzing corruption in international business

23
 Table 1
Ranking of countries by alternative classifications of the level of corruption in the country, top and bottom countries
Transparency International Corruption World Bank Governance Indicators, Control of Transparency International Global World Bank Enterprise Survey, latest year (varies
Perception Index 2014 Corruption 2013 Corruption Barometer 2013 by country)
Rank Country / Score Rank Country/ Territory Control of Rank Country Have you paid a bribe to Rank Economy Bribery incidence
Territory Corruption any one of 8 services (percent of firms
Estimate listed (education, experiencing at
judiciary, medical and least one bribe
health, police, registry payment request)
and permit services,
utilities, tax revenue
and/or customs, land
services) in the past 12
months? %
Top
1 Denmark 92 1 Denmark 2.41 1 Australia 1 1 Eritrea 0.00
2 New Zealand 91 2 New Zealand 2.35 2 Denmark 1 2 Estonia 0.00
3 Finland 89 3 Sweden 2.29 3 Finland 1 3 Israel 0.10
4 Sweden 87 4 Norway 2.29 4 Japan 1 4 Slovenia 0.20
5 Norway 86 5 Finland 2.19 5 Spain 2 5 Barbados 1.20
6 Switzerland 86 6 Switzerland 2.13 6 Canada 3 6 Chile 1.30
7 Singapore 84 7 Luxembourg 2.11 7 Korea (South) 3 7 Ecuador 1.70
8 Netherlands 83 8 Singapore 2.08 8 Malaysia 3 8 Poland 1.90
9 Luxembourg 82 9 Netherlands 2.05 9 Maldives 3 9 Sweden 1.90
10 Canada 81 10 Iceland 1.90 10 New Zealand 3 10 Cabo Verde 2.00
11 Australia 80 11 Canada 1.87 11 Norway 3 11 Hungary 2.10
12 Germany 79 12 Liechtenstein 1.83 12 Portugal 3 12 Colombia 2.20
13 Iceland 79 13 Germany 1.78 13 Uruguay 3 13 Georgia 2.20
14 United Kingdom 78 14 Australia 1.76 14 Belgium 4 14 St. Kitts & Nevis 2.20
15 Belgium 76 15 United Kingdom 1.68 15 Croatia 4 15 Uruguay 2.20
Bottom
161 Angola 19 196 Venezuela, RB -1.28 81 Morocco 49 124 Congo, Rep. 37.50
162 Guinea-Bissau 19 197 Chad -1.28 82 Ghana 54 125 Vietnam 38.30
163 Haiti 19 198 Congo, Dem. Rep. -1.30 83 India 54 126 Myanmar 42.90
164 Venezuela 19 199 Angola -1.32 84 Tanzania 56 127 Afghanistan 46.80
165 Yemen 19 200 Guinea-Bissau -1.33 85 Cambodia 57 128 Bangladesh 47.70
166 Eritrea 18 201 Turkmenistan -1.34 86 Senegal 57 129 South Sudan 48.00
167 Libya 18 202 South Sudan -1.36 87 Uganda 61 130 Ukraine 50.40
168 Uzbekistan 18 203 Korea (North) -1.36 88 Cameroon 62 131 Angola 51.30
169 Turkmenistan 17 204 Zimbabwe -1.37 89 Libya 62 132 Congo, Dem. Rep. 56.50
170 Iraq 16 205 Burundi -1.39 90 Mozambique 62 133 Kyrgyz Republic 59.80
171 South Sudan 15 206 Afghanistan -1.43 91 Zimbabwe 62 134 Guinea 60.70
172 Afghanistan 12 207 Sudan -1.49 92 Kenya 70 135 Yemen, Rep. 64.30
173 Sudan 11 208 Libya -1.52 93 Yemen 74 136 Cambodia 69.40
174 Korea (North) 8 209 Somalia -1.58 94 Liberia 75 137 Syria 69.60
175 Somalia 8 210 Equatorial Guinea -1.61 95 Sierra Leone 84 138 Liberia 70.50
Sources: Transparency International (2013, 2014), World Bank (2013, 2015)

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 Table 2
Corruption in international business: Suggestions for extending theories of the firm

Theory Agency
Initial arguments Jensen & Meckling (1976),
Holmstrom (1979)
Assumption on Bounded rationality
individuals’ Imperfect information
behavior Information asymmetry
Asset specificity
Opportunism
Disciplinary basis Economics
Key question on How can owners or top
corruption managers prevent managerial
misbehavior in relationships
with government officials?
Transaction cost economics
Coase (1937), Williamson
(1975; 1985), North (1990)
Bounded rationality
Imperfect information
Information asymmetry
Asset specificity
Opportunism
Economics
How can managers reduce
transaction costs in their
relationship with the
government?
Resource-based view
Penrose (1959), Barney (1991)
Bounded rationality
Imperfect information
Information asymmetry
Asset specificity
Economics
How can the firm improve its
competitive advantage when
dealing with the government?
Resource dependence
Pfeffer & Salancik (1978)
Bounded rationality
Imperfect information
Information asymmetry
Sociology
How can managers reduce the
power dependence on the
government?
Neo-institutional
DiMaggio & Powell (1991)
Bounded rationality
Imperfect information
Information asymmetry
Asset specificity
Sociology
How can managers facilitate the
legitimacy of the firm in its
relationships with the
government?

Key answer on Owners or top managers Corruption increases transaction Managers develop capabilities Managers depend on Managers implement practices
corruption establish controls to prevent costs, but managers may pay for dealing with the government government officials for permits that are legitimate in the country
managers from misbehaving and bribes to reduce transaction costs to enhance and protect the firm’s and contracts and seek support in response to the cognitive,
bribing government officials sources of advantage via cooptation normative and regulatory
pressures
Key question on How does an MNC managerial How does an MNC manage How does an MNC achieve a How does and MNC deal with How does an MNC solve the
corruption in misbehavior in a corrupt host transactions in a corrupt host competitive advantage in a power relationships with a legitimacy tensions between
international country? country? corrupt host country? corrupt host country home country and a corrupt host
business government? country?
Key answer on Managers abroad pay bribes to Managers abroad pay bribes to Managers abroad develop a Managers abroad bribe powerful Managers abroad engage in
the payment of ensure the success of the local facilitate transactions with bribery capability that provides government officials to ensure legitimate but illegal bribery in
bribes in operation and advance their corrupt parties an advantage over competitors support for the operation the host country
international careers
business
Key answer on MNC designs incentive and MNC internalizes transactions to Managers compensate from the Managers claim power from the Managers follow practices that
avoiding bribes control systems to prevent avoid paying bribes lack of a bribery capability with home country to reduce the are legitimate in the home
in international subsidiary managers from other sources of advantage dependence on the host country country and apply them in the
business bribing abroad government host country
Potential Unethical agency Illegal transaction costs Corporate social Ethical power escape: Illegal legitimacy: Managers
theoretical relationships: Principals minimization: Managers irresponsibility capability: Managers reduce power achieve legitimacy by
extension from establish unethical agency minimize transaction costs by Managers develop a capability to relationships with the corrupt implementing accepted but
the analysis of relationships with agents and engaging in illegal transactions bribe abroad as an additional host country government by illegal practices
corruption in design incentive and control source of advantage even if it is increasing the power of the clean
international systems that rely on trust not legal home country government over
business the firm

25
 Figure 2
Integrating theories of the firm in the analysis of corruption in international business

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