BUSHOR-1502; No.

of Pages 13

Business Horizons (2018) xxx, xxx—xxx

Available online at www.sciencedirect.com

ScienceDirect
www.elsevier.com/locate/bushor

Business corruption in Ukraine: A way to

get things done?
Elena Denisova-Schmidt a,*, Yaroslav Prytula b

a
University of St. Gallen (HSG), Gatterstrasse 3, 9010 St. Gallen, Switzerland
b
Ukrainian Catholic University, 79011 Lviv, Ukraine

KEYWORDS Abstract Corruption at the firm level is a very complex issue better understood
Business corruption; within its cultural, national, and historical contexts. Using Ukrainian firms as an
Business in Ukraine; example via two data sets from 2013 (n = 625) and 2015 (n = 120), we describe two
Bribery; types of corruption: (1) the abuse of power by individuals or groups for private gain,
Bureaucratic and (2) abuse of power by CEOs and general managers not for their own private gain,
corruption; but for the gain of other individuals or groups. The latter abuse of power–—either
Corruption mitigation; within or beyond the existing rules, laws, and norms–—is often the only way to get
Informality things done in Ukraine. On the other hand, corruption might also be used to hinder
business activities. This ambivalent function is the main challenge in mitigating
corruption.
# 2018 Kelley School of Business, Indiana University. Published by Elsevier Inc. All
rights reserved.

1. A deep dive into corruption (Ledeneva, 2006, p. 1). Off-the-books activities,

The planned economy that ruled in Eastern Europe
for many decades was based customarily on the
“illegal use of state material and financial resour-
ces” (Apressyan, 1997, p. 1563) and it encouraged
“a variety of practices for cheating the system”
* Corresponding author
E-mail addresses: elena.denisova-schmidt@unisg.ch
(E. Denisova-Schmidt), ya.prytula@ucu.edu.ua (Y. Prytula)
double accounting, and blat–—defined as “the use
of personal networks and informal contacts to
obtain goods and services in short supply and to
find a way around formal procedures” (Ledeneva,
1998, p. 1)–—have dominated in many communist
countries. What does business in Eastern Europe
look like today? Is cheating still prevalent or has
the system recovered with the new post-
communist generation? Do companies, managers,
and other practitioners operate ethically or does
corruption still dominate the landscape? Using

https://doi.org/10.1016/j.bushor.2018.06.004
0007-6813/# 2018 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.
BUSHOR-1502; No. of Pages 13
2 E. Denisova-Schmidt, Y. Prytula
Ukraine as an example, we address these and other
similar questions.
Why Ukraine? After the breakup of the Soviet
Union, many economists considered the new in-
dependent states and their transformation from
planned to market economies as a natural
experiment that rarely occurs in history (Filer &
Hanousek, 2002; Fuchs-Schündeln & Hassan,
2016). We might consider Ukraine more narrowly
as a natural experiment for anti-corruption trans-
formation. Independent Ukraine is perhaps more
strongly committed than other Eastern European
countries to battling corruption. The firm desire
to combat corruption was a catalyst of both
revolutions, the Orange Revolution in 2004 and
the Revolution of Dignity in 2014. The latter
revolution brought significant political and eco-
nomic changes. These included the expulsion of
the highly corrupt president Viktor Yanukovych
along with his allies, and the election of a new
parliament and new president Petro Poroshenko,
who came to power with promises of fighting
corruption and a new life for Ukraine, the loss
of Crimea, and the war in Eastern Donbas (Kuzio,
2015).
The Revolution of Dignity showed the strength of
the public’s demand for change; voluntary anti-
corruption movements mushroomed in different
regions of Ukraine. A new anti-corruption strategy
with clear priorities and indicators for measuring
progress was introduced and, as a result, the gov-
ernment established a new law to prevent corrup-
tion and new anti-corruption institutions such as
the National Agency for the Prevention of Corrup-
tion, the National Anti-Corruption Bureau, and the
Special Anti-Corruption Prosecutor’s Office (Fluri &
Badrack, 2016). This resulted in the prosecution of
a number of corrupt officials, but rarely did they
end with prison time. Francis Malige, the managing
director for Eastern Europe and the Caucasus at the
European Bank for Reconstruction and Develop-
ment (EBRD), recently said: “Ukraine’s judiciary
looks like sport fishing: you catch the big fish, you
identify it, you take a photo and then you put it
back in the water” (Unian, 2017). Despite all
efforts, a culture of corruption still prevails in
Ukraine. Therefore, Ukraine today is an
excellent natural experiment on the battle against
corruption, with the general population, public anti-
corruption initiatives, international donors, and many
new government officials on the one side, and an
invisible network of corrupt officials–—including judg-
es and prosecutors–—on the other. In 2015, a popula-
tion survey was conducted among 6,000 respondents
in Ukraine. The survey included a question
regarding how respondents viewed practices that
are incompatible with the development of society
(see Table 1; Denisova-Schmidt, 2014). The results
show an ambivalent attitude toward some practices,
illustrating the complexity of this phenomenon in
society.
But what about corruption at the firm level? Not
the lack of transparency in the privatization of
state enterprises (e.g., Hoff & Stiglitz, 2004), raid-
ing (e.g., Rojansky, 2014), or the role of oligarchs
(e.g., Åslund, 2014), but rather corruption–—in the
purchasing department when choosing new suppli-
ers, in the human resources department when
recruiting and promoting new staff, or in using
company resources for private purposes among
top managers? Is this also a challenge, simply a
common way to get things done, or just an effec-
tive tool in running a business? There are few
studies on corruption at the firm level (not only
in Ukraine, but globally), much less on how to deal
with it. This does not mean that the problem does
not exist, just that it has remained under-
researched for many reasons (see de Jong & van
Ees, 2014; Zyglidopoulos, 2016).
Since 2011, we have been studying corruption
among Ukrainian enterprises (e.g., Denisova-
Schmidt, 2014; Denisova-Schmidt, Huber, & Prytula,
2015, 2016; Denisova-Schmidt & Prytula, 2015a,
2015b, 2016a, 2016b, 2017). There are several ap-
proaches to the study of corruption:
1. The principal-agent theory, which considers cor-
ruption a deviation;
2. Collective action theory, which defines corrup-
tion as the norm; and
3. The third perspective (i.e., corruption is a way of
getting things done), which analyzes the func-
tions that corruption serves and develops alter-
native solutions (Denisova-Schmidt & Prytula,
2017; Ledeneva, Bratu, & Köker, 2017).
With this article, we are contributing to the latter
approach, the third perspective.
Based on our first survey in 2013, conducted
among 625 firms in all 25 of Ukraine’s administrative
regions (24 oblasts and the Autonomous Republic of
Crimea), we found no statistically significant differ-
ences in terms of the firms’ industry or size or the
respondents’ experiences with the firm, gender, or
educational levels. Statistically significant differ-
ences were found only in terms of ownership (with
foreign companies being more resistant to corrup-
tion) and in terms of regions. Our results showed
that corruption is perceived to be less prevalent
in the South and in the West of Ukraine when
BUSHOR-1502; No. of Pages 13
Business corruption in Ukraine: A way to get things done?
Table 1. Practices incompatible with good social development
Question: “In general, which of the following practices, in your opinion, spoil the good development of a society?”
Practices
Buying votes during elections
Giving jobs to friends or relatives instead of people who deserve them
Bringing gifts to obtain access to health services
Bringing gifts to be accepted at a good school
Exchanging confidential information to get tenders and public construction bids
Paying fees to have documents sorted out quickly
Convincing journalists not to publish sensitive articles
Using scandals to get rid of political opponents
Using development funds for private purposes
Source: This table is based on the results of a 2015 mass-population survey in Ukraine carried out within the project Region, Nation,
and Beyond: An Interdisciplinary and Transcultural Reconceptualization of Ukraine (http://www.uaregio.org/en/about/stage-1/)
compared to the East.1 One of the anti-corruption
strategies frequently employed in the West, how-
ever, was the use of third parties to work with local
partners on difficult issues. Is corruption in Western
Ukraine indeed low or is it just outsourced? Hence,
in our second survey in 2015 (see Appendix) we went
to the West and, using one oblast (Lviv) as an
example, looked deeper into the region perceived
to be less corrupt (Denisova-Schmidt & Huber, 2014;
Denisova-Schmidt et al., 2015; Foster, 2015).
There, we focused our questions more on the rea-
sons behind the use of various corrupt techniques
and their justifications. We surveyed leaders from
120 businesses in Lviv.
2. Data
Our data set was collected between February and
March 2015 by a sociological company on behalf of a
joint project that involved researchers from two Eu-
ropean universities. The 120 respondents–—owners,
CEOs, and top managers of enterprises in the Lviv
region–—were selected from the seven key
economic sectors in Ukraine: agriculture, mining,
construction, manufacturing, trade, transport, and
communications, along with other service industries
(Derzcomstat, n.d.).
1
The East represents Donetsk, Luhansk, Kharkiv, Zaporizhzhia,
and Dnipropetrovsk; the North represents Poltava, Kirovohrad,
Cherkasy, Chernihiv, and Sumy; the South represents Kherson,
Odesa, and Mikolaiv; the Center represents Zhytomyr, Vinnytsia,
Khmelnytskyi, Rivne, and Volyn; and the West represents Cher-
nivtsi, Zakarpatia, Lviv, Ternopil, and Ivano-Frankivsk. Regional
classifications are explained in detail in Denisova-Schmidt and
Huber (2014).
3
Yes
61.2%
52%
34.4%
23%
29.8%
30.4%
19.5%
18.8%
67.4%
When talking about corruption, our respondents
could be divided into two groups, depending on
their control over the situation: (1) those who
consider corruption often as the only way to do
business in the country and (2) those who claim
that they never use any forms of corruption, espe-
cially monetary ones. To reform the behavior of the
first group, the obvious solution would be to change
the mindset of those who both demand and supply
corrupt practices; the second group sees a way
forward in the aggressive and immediate purifica-
tion of government structures by removing the
corrupt officials, who they consider the alpha and
omega of the system. For the first group, corruption
is a brake for domestic business development while,
for the second, it is an interstate enemy to which
they are powerless.
In our survey, we recoded the negatively connot-
ed word corruption into the more neutral ‘informal
practices’ to refer to the practical norms CEOs
and managers often use to get things done (see
Shekshnia, Ledeneva, & Denisova-Schmidt, 2013,
2014, 2017). In our questionnaires, we asked about
the informal practices used within the company,
such as whether companies tend to pay salaries to
their staff in cash, or if managers receive any
benefits from job candidates or use company funds
or employees for their personal needs. We also
asked about any informal practices that occur in
their dealings with suppliers and buyers. We talked
with companies about their interactions with local
and state authorities, with different control agen-
cies, and with tax inspectors and the courts. All of
these actions are informal practices on the part of
the practitioners, but according to Transparency
International, they are all forms of corruption:
the abuse of entrusted power for private gain
BUSHOR-1502; No. of Pages 13
4 E. Denisova-Schmidt, Y. Prytula
(see Table 2A) or the abuse of power by either indi-
viduals or groups for private gain (Zyglidopoulos,
2016). The distinction here is that first-order corrup-
tion happens “within a given system of rules, laws, or
norms, by either breaking them or interpreting them
in their favor” and second-order corruption occurs
“by creat[ing] new rules and norms that unfairly favor
them personally, immediately, and in the future”
(Zyglidopoulos, 2016, pp. 4—5).
We did not intend to find out which was the most
or the least corrupt company (Table 2B), nor to
blame any firms; instead, we were more interested
in exploring the reasons why CEOs and general
managers use these practices in order to better
understand the function of informal practices.
3. Results
3.1. Informal practices and the functions
they serve
What are the typical situations in which informal
practices are used and why?
Table 2A. Informal practices vs. corruption
Informal practice as known to practitioners
Selecting vendors/contractors/winners of open tenders on
the basis of informal relationships and agreements
Receiving kickbacks or other informal rewards (i.e.,
expensive gifts) from vendors/suppliers/buyers
Paying salaries and bonuses to staff in cash without paying
taxes or social fees
Receiving commissions or other material benefits from job
candidates
Using company funds, facilities, or staff for personal gain
Using kompromat, security department information against
competitors
Using company staff for personal service to managers
(assistance to family members, construction and decoration
of housing, organization of holidays and entertainment)
Selecting vendors/contractors with whom regional managers
have informal relationships or arrangements
Employing relatives and friends without appropriate
knowledge and experience, without competition
Creating informal alliances with other companies in the
region to exert influence on regional authorities
Using informal connections and networks to obtain state
orders (state procurement) and loans from state banks
Use of company funds by heads of regional subdivisions to buy
expensive cars, telephones, travel, etc.

Case 1: A CEO running a medium-sized company
prefers to pay some employee salaries partly in
cash, believing the money is better invested if it
goes directly into the pockets of his/her staff and
not to the state.
The number of companies–—especially small- and
medium-sized ones–—that paid salaries in cash (i.e.,
without paying social taxes) increased between
2013 and 2015. In 2015, 71% of surveyed companies
indicated the use of such practices. Some partic-
ipants in our survey even laughed ironically when
they heard this question. This is because the eco-
nomic decline of 2014 and 2015 in Ukraine coincided
with a business-unfriendly taxation policy: employ-
ers had to pay up to 60% of their employees’ salaries
in taxes for every employee–—money needed within
the enterprise. One CEO managing a service com-
pany explained: “There are only a few companies
offering a ‘white’ salary in my sector: McDonald’s
and Svit Kavy. The others keep the money within
their enterprises.” Otherwise, firms would need to
reduce their salaries considerably and this action
might demotivate their employees enormously;
Forms of corruption in the
TI classification

CRONYISM

NEPOTISM

LOBBYING

GIFT

CONFLICT OF INTEREST

FRAUD

GIFT

CONFLICT OF INTEREST

ABUSE OF POWER OR OFFICE

INFLUENCE PEDDLING

ABUSE OF POWER OR OFFICE

CRONYISM AND NEPOTISM

CONFLICT OF INTEREST

CRONYISM AND NEPOTISM

CONFLICT OF INTEREST

ABUSE OF POWER OR OFFICE
BUSHOR-1502; No. of Pages 13

Business corruption in Ukraine: A way to get things done? 5

Table 2B. Frequency of usage of informal practices

Practices never seldom sometimes often systematically hard
to say/no answer
Selecting vendors/ 5.8% 10% 30% 20% 11.7% 22.5%
contractors/winners of open n=7 n = 12 n = 36 n = 24 n = 14 n = 27
tenders on the basis of
informal relationships and
agreements
Receiving kickbacks or other 20% 25% 24.2% 10.8% 5.0% 15.0%
informal rewards (i.e., n = 24 n = 30 n = 29 n = 13 n=6 n = 18
expensive gifts) from
vendors/suppliers/buyers
Paying salaries and bonuses 12.5% 13.3% 20% 17.5% 25.8% 10.8%
to staff in cash without n = 15 n = 16 n = 24 n = 21 n = 31 n = 13
paying taxes or social fees
Receiving commissions or 55.8% 18.3% 12.5% 5.0% 0 8.3%
other material benefits from n = 67 n = 22 n = 15 n=6 n = 10
job candidates
Using company funds, 37.5% 19.2% 22.5% 8.3% 2.5% 10.0%
facilities, or staff for n = 45 n = 23 n = 27 n = 10 n=3 n = 12
personal gain
Using kompromat, security 54.2% 19.2% 10.8% 2.5% 1.7% 11.7%
department information n = 65 n = 23 n = 13 n=3 n=2 n = 14
against competitors
Using company staff for 40.0% 20.8% 15.8% 7.5% 4.2% 11.7%
personal service to n = 48 n = 25 n = 19 n=9 n=5 n = 14
managers (assistance to
family members,
construction and decoration
of housing, organization of
holidays and entertainment)
Selecting vendors/ 18.3% 21.7% 27.5% 16.7% 6.7% 9.2%
contractors with whom n = 22 n = 26 n = 33 n = 20 n=8 n = 11
regional managers have
informal relationships or
arrangements
Employing relatives and 28.3% 31.7% 17.5% 8.3% 5.0% 9.2%
friends without appropriate n = 34 n = 38 n = 21 n = 10 n=6 n = 11
knowledge and experience,
without competition
Creating informal alliances 25.0% 19.2% 25.0% 10.0% 9.2% 11.7%
with other companies in the n = 30 n = 23 n = 30 n = 12 n = 11 n = 14
region to exert influence on
regional authorities
Using informal connections 26.7% 15.8% 22.5% 10.0% 9.2% 15.8%
and networks to obtain state n = 32 n = 19 n = 27 n = 12 n = 11 n = 19
orders (state procurement)
and loans from state banks
Use of company funds by 42.5% 15.8% 12.5% 9.2% 5.8% 14.2%
heads of regional n = 51 n = 19 n = 15 n = 11 n=7 n = 17
subdivisions to buy
expensive cars, telephones,
travel, etc.
BUSHOR-1502; No. of Pages 13
6 E. Denisova-Schmidt, Y. Prytula
hence, many of them prefer to pay their social
contribution directly to their staff. In the compa-
nies’ view, there are also no guarantees that the
money paid to the state will return to its citizens in
the form of pensions or other social obligations.

Case 2: One CEO did everything possible in order
to place his/her son at the Ukrainian Security
Service. Now the son is in a position to help the
firm resolve any potential problems with state
authorities.
These potential problems typically involve minimiz-
ing red tape as much as possible, which may be
connected to unofficial payments. Some firms ad-
mitted that they sometimes pay informally while
working with authorities. The customs office seems
to be the most difficult of the public institutions to
deal with. The payment amount depends on many
factors, such as the problem to be solved, the
institution to which the payment goes, the com-
pany’s resources (e.g., size, turnover), or the
type of industry. Such payments might range from
1%—35%. Our respondents mentioned that they of-
ten resort to such payments in order to get things
done–—such as to speed up an application or to mini-
mize bureaucracy–—and not to do something wrong or
inappropriate. Moreover, firms are often the first to
initiate such payments (directly by themselves or
through brokers), not the officials. The CEOs also
indicate that state officials use a selective approach
when working with firms: small and medium-size
companies are usually under more pressure than
large enterprises and foreign companies rarely en-
counter the types of extortion domestic firms face.

Case 3: The head of a purchasing department
organizes an open tender (i.e., open bidding
process). The tender is in fact a show. The winner
is known in advance: It is a supplier that has a
long-term relationship with this enterprise.
Moreover, the supplier’s CEO and the department
head were formerly classmates.
Our respondents admitted that situations in which
their choice of open tender winners is based on
informal relations are the norm, especially in pro-
curement. They often appeal to a system of kick-
backs established over the years in Ukraine. The
potential risks with a new and unknown supplier
might be high and refer not only to unpredictable
costs, but also to an unpredictable quality of prod-
uct and service offerings (Denisova-Schmidt &
Kryzhko, 2015, 2016). Friendly relationships
between the head of the purchasing department
and the CEO of the supplier is considered an
advantage–—the trust among inner circles is partic-
ularly high, especially in societies with weak formal
institutions (Rothstein & Stolle, 2008). According to
our respondents, kickbacks are more noticeable and
more difficult when working with public intuitions.
Kickbacks might reach 80% of the tender in the
service sector, 50% in the insurance sector, and
10% in the construction sector. One CEO recalled:
“In 2006, a tender for road construction was raffled.
Kickback was 35% with a return of 7%. And what to
do in this situation? That’s right–—a low-quality
road.” This meant that the budget for building
the road would be cut and devoted to a bribe.
All three cases demonstrate that CEOs and gen-
eral managers can abuse their power, but it might
often happen for the gain of other individuals (Case
1) or groups (Case 2 and Case 3). By doing so, CEOs
and general managers might also be able to save
their businesses and/or their jobs in the long term.
This might be judged as a personal gain, however.
The distinction between private and public–—a cru-
cial point for analyzing corruption–—is not clear in
many post-communist societies (Ledeneva, 2009,
2013; Rothstein & Torsello, 2014). Public gain might
also be understood here “in terms of status and
influence” (Ledeneva, 2009, p. 258). Moreover,
corruption for public gain might be socially accept-
ed and even have a positive short-term effect. Some
decision makers use the populistic rhetoric of acting
in the public’s interest in order to mask the classic
types of second-order corruption.
The decades of low gas prices in Ukraine, for
example, made a few oligarchs very rich but did not
provide a positive effect on Ukrainian business and
the economy as a whole. The essence of the oli-
garchs’ strategy was to buy cheap gas at a second-
order corruption state-regulated price and to sell it
at a market price to the state-owned companies
using first-order corruption schemes–—or, alterna-
tively, to export gas or produce commodities for
export using cheap gas (Åslund, 2014). Neverthe-
less, the high level of uncertainty in the country, as
well as the lack of clear rules and procedures on
privatization/re-privatization/nationalization
(Åslund, 2014), forbids business owners from think-
ing and operating in a long-term perspective. This is
irrational.
Corruption among Ukrainian firms seems to be
acceptable if it helps businesses get things done and
survive; it is less acceptable if it leads to profit
maximization. In our survey, we asked the CEOs and
general managers this question: “Would you break
relations with a company that pollutes the environ-
ment through corrupt practices in doing business?”
We then offered three possible reasons behind the
corruption:
BUSHOR-1502; No. of Pages 13
Business corruption in Ukraine: A way to get things done?
1. If it is a question of the company’s survival;
2. If the company maximizes its profits by doing
this; or
3. If the company publicly announces that its busi-
ness is corruption free.
The scale ranged from 1 (will never break relations)
to 5 (surely will break relations). Respondents
showed statistically significant differences when
answering these questions, indicating a higher level
of support for companies that resort to such
practices in order to survive (Denisova-Schmidt &
Prytula, 2016a). The answers differ significantly
between reason 2 (mean value = 3.66) and reason
1 (mean value = 3.16), with a mean difference equal
to 0.517 (t-test p-value = 0.000).
Companies that use corrupt practices actively for
their survival are not such an unusual phenomenon
on the Lviv market, according to the respondents.
Although, on average, respondents do not support
cooperation with companies that use corrupt prac-
tices (mean value = 3.54), a company’s survival
makes a good excuse for continuing cooperation
with corrupt businesses. Cooperation with these
companies is inevitable, and for an entrepreneur
to refuse cooperation because it is corrupt is con-
sidered a rather lame excuse. The force of the
argument is tempered by the instinct of self-
preservation (the element of environmental pollu-
tion was not generally seen as a case or a key
purpose). Cooperation with such companies, by
contrast, is seen as helping them to survive. The
number of hypothetical refusals to cooperate rises
significantly when talking about companies that
pollute the environment and use corrupt practices
actively to maximize profits, just as with companies
that behave similarly by publicly announcing them-
selves to be uncorrupt participants in the business
environment.
To further explore the ambivalence toward cor-
ruption, we added an experimental question to our
survey and asked our respondents to imagine and
respond to the following four (1a, 1b, 2a, 2b)
hypothetical scenarios in random order (see Klasnja
& Tucker, 2013):

1a: An entrepreneur carries out his construction
business in a mid-size city in Ukraine. Last year,
the entrepreneur reportedly (rumor, no
evidence) gave 20% of the contract’s total to
receive a profitable government agreement for
the construction of quality public housing. Cur-
rently this entrepreneur is running for city may-
or. In your opinion, what are the chances that
7
your friends that live in the city would vote for
this candidate?

1b: An entrepreneur carries out his construction
business in a mid-size city in Ukraine. Last year,
the entrepreneur reportedly (rumor, no evi-
dence) gave 20% of the contract’s total to receive
a profitable government agreement for the con-
struction of poor-quality public housing. Current-
ly this entrepreneur is running for city mayor. In
your opinion, what are the chances that your
friends that live in the city would vote for this
candidate?

2a: An entrepreneur carries out his construction
business in a mid-size city in Ukraine. Last year,
the entrepreneur fairly won a tender for a profit-
able government contract to construct quality
public housing in the city. Currently this entre-
preneur is running for city mayor. In your opinion,
what are the chances that your friends that live in
the city would vote for this candidate?

2b: An entrepreneur carries out his construction
business in a mid-size city in Ukraine. Last year,
the entrepreneur fairly won a tender for a profit-
able government contract to construct poor-
quality public housing in the city. Currently this
entrepreneur is running for city mayor. In your
opinion, what are the chances that your friends
that live in the city would vote for this candidate?
The available responses were (1) definitely NO
chance, (2) rather NO than YES, (3) 50/50 chance,
(4) rather YES than NO, and (5) definitely YES. The
difference with respect to corruption (2.905-
2.485 = 0.42) is less then the difference with re-
spect to the results of work (3.04-2.35 = 0.69). Yet
this difference is not statistically significant (see
Table 3). In addition, it is interesting to note that
the corrupt candidate who built the quality housing
has a greater chance of winning than the honest
candidate who cannot build quality housing
(2.77 vs. 2.5, which is not a statistically significant
difference).
Similar conclusions can be made from the results
obtained from the regression analysis of the hypo-
thetical voting. Based on the respondents’ answers
to the hypothetical voting experiments presented in
the four aforementioned scenarios, we estimated
the following regression model:
Votei ¼ b0 þ b1 Bribei þ b2 Q uality i þ b3 Bribei
 Q uality i þ ei
BUSHOR-1502; No. of Pages 13

8 E. Denisova-Schmidt, Y. Prytula

Table 3. Previous business experience and local government

Condition A Condition B Average
Quality public Public housing of very
housing was built poor quality was built
ENTERPENEUR STATUS 1: 2.77 2.20 2.485

Gave 20% of the

contract’s total to
receive a profitable
government agreement
for the construction of
public housing in the
city. There were
rumours in the air about
it, but there was no
evidence.
ENTERPENEUR STATUS 2: 3.31 2.50 2.905

Won a tender fairly for a

profitable government
contract to construct
public housing in the
city. There were
rumours in the air about
it, but there was no
evidence.
Average 3.04 2.35

where Votei is i’s respondent answer (ranged from
1 [definitely no] to 5 [definitely yes]) to the four
hypothetical questions. Bribe equals 1 if the respon-
dent receives a questionnaire with scenarios 1a or
1b, and 0 otherwise (scenarios 2a and 2b). Quality
equals 1 if the respondent receives a questionnaire
with scenarios 1a or 2a and 0 otherwise (scenarios
1b and 2b). A very similar research design was
implemented by Klasnja and Tucker (2013); in our
case, we slightly reformulated the questions based
on feedback from the pilot study.
The estimation results are shown in Table 4 and
suggest that, in general, the respondents punish
bribing behavior irrespective of the information
about the quality of building; at the same time,
they support quality work regardless of the infor-
mation about bribing. On the other hand, the posi-
tive and significant sum of coefficients b2 and b3
indicates that the respondents are prepared to
tolerate bribing if they receive quality services.
We received additional arguments in favor of the
popularity of kickbacks when choosing the winner of
open tenders. It should be mentioned that formu-
lating the question with the case of fair play (sce-
nario 2a and scenario 2b) raised eyebrows regarding
the probability of such a situation in Ukraine. As
was the case of companies polluting the environ-
ment, the quality of the building constructed as a
result of the project implementation and the
bribery factor are leveled on the political back-
ground. Frequently, respondents remarked that
such experience (fair play or not, quality building
or not) does not really matter when it comes to their
choice of candidate for mayor. According to the
entrepreneurs, a candidate’s action plan, political
affiliation, and personality are what they consider
important when choosing elected officials.
3.2. Dealing with public institutions
Corruption might be a way to get things done, but it
also might be used as a way to prevent things from
getting done–—a tool some public institutions might
use to hinder businesses. A CEO, for example, might
use his or her personal networks in a government
agency to speed up a procedure. The existence of
personal networks does not necessarily guarantee
success. It might depend on the power of these net-
works, a willingness to intervene, and the frequency
the networks are used as well as on whether or not the
procedure can be sped up. An agency might overuse
its power and demand too many things from a CEO in
order to hinder his or her business activities. Corrup-
tion at public institutions in Ukraine is viewed with
disdain even by those respondents who refused to
answer certain questions related to the subject.
BUSHOR-1502; No. of Pages 13
Business corruption in Ukraine: A way to get things done?
Table 4. Hypothetical voting: Does corruption matter for voters?
Dependent variable: Respondent answer (1 — “definitely NO”; 2 — “rather NO than YES”; 3 — “50/50 chance”; 4 —
“rather YES than NO”; 5 — “definitely YES”) to the hypothetical question presented in the four scenarios.
Bribing effect | Quality –— good
Bribing effect | Quality –— poor
Quality effect | Bribing –— no
Quality effect | Bribing –— yes
Interaction effect: Bribing –— yes, Quality –— good
Robust standard errors are in parentheses.
**
p < 0.05.
***
p < 0.01.
Their reasons for refusing to answer included para-
noia regarding the possibility that the answers to
these questions may be used against them later.2
Despite the tax office’s heavy involvement in corrup-
tion, respondents were convinced that if you do
everything according the law then the need to pay
a bribe disappears. One respondent said: “With large
businesses, tax service is like silk; small and medium
businesses have frequent problems.” Considering
that it is the tax office entrepreneurs most frequently
deal with (e.g., monthly for reporting, frequent
checks), such a tendency inspires hope.
The customs office was recognized as one of the
most corrupt institutions in the country. However,
according to the respondents, there have recently
been noticeable improvements at the customs of-
fice. Those who do not want to pay bribes may do
everything right without problems: “It was once
that we always gave bribes; now the customs office
isn’t given bribes.” But there is still a considerable
number of businesspeople who use bribes to simpli-
fy or accelerate work with customs representatives
and who act as initiators for the involvement of
informal practices in cooperation processes. Very
often, companies use a broker to get things done. It
should be noted that only those respondents whose
companies deal with the export or import of goods
and services are affected by this institution.
The involvement of the judicial system in corrup-
tion was omitted by the respondents, perhaps be-
cause some of them decided to appeal to the court to
solve the issue of unofficial payments demanded
by representatives of other government institutions
(e.g., the tax office). Describing a run-in with the
office that handles fire inspection, one respondent
complained about a moratorium violation: “They
2
NB: They spoke on condition of anonymity.
9
b1 0.30 (0.24)
b1 + b3 0.54 (0.28) **
b2 0.81 (0.25) ***
b2 + b3 0.57 (0.24) **
b3 0.24 (0.35)
N = 119
come regularly and each time it costs 50-100 UAH,”
said one respondent. The police are also frequent
visitors and arrange inspections without warning so
businesspeople cannot avoid material costs.
When it comes to administrations at various
levels of the government and their involvement in
corruption, the respondents noted patterns of pro-
portional growth of corruption and arrogance re-
garding officials at higher levels of centralization
(city vs. region vs. state). Entrepreneurs noted the
valuable support of the Lviv city council (mis’ka
administratciia), however.
Two-thirds of respondents acknowledged the ex-
istence of bribery in public institutions, with the
size of the bribe ranging from 1% to 35%, depending
on several factors:

Institution to which the payment goes;

Company size;

Company revenue/turnover;

Industry in which the company operates; and

Other specific factors such as the total value of
the goods (when talking about the customs office)
or the penalty (when it comes to tax).
Respondents also indicated that state officials deal
with various companies differently. It was recog-
nized that pressure on small and medium-sized
enterprises is much greater than on big ones,
and that foreign companies rarely face the extor-
tions domestic firms do: “Without these payments
it is practically impossible to do business.” Only a
few respondents demonstrated a lack of experi-
ence and/or a recent abandoning of bribery to
officials.
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10 E. Denisova-Schmidt, Y. Prytula

Table 5. Anti-corruption strategies

Strategy never seldom sometimes often systematically hard to say/no answer
Buffer strategy: the use of 15% 32.5% 20.8% 10.0% 5.8% 15.8%
subcontractors, agents, and third n = 18 n = 39 n = 25 n = 12 n=7 n = 19
parties to work with regional
authorities and regulatory agencies
Allocation of annual budget for 37.5% 24.2% 14.2% 4.2% 3.3% 16.7%
developing informal relationships n = 45 n = 29 n = 17 n=5 n=4 n = 20
with representatives of regional
authorities and regulatory agencies
Proactive proposals to regional 35% 29.2% 15% 5.8% 0.8% 14.2%
authorities and regulatory agencies n = 42 n = 35 n = 18 n=7 n=1 n = 17
on cooperation programs and
methods
Creation and dissemination of Codes 19.2% 18.3% 22.5% 15.8% 14.2% 10%
of Corporate Behavior n = 23 n = 22 n = 27 n = 19 n = 17 n = 12
Active briefing of partners on the 24.2% 29.2% 15% 11.7% 8.3% 11.7%
company’s rules and standards for n = 29 n = 35 n = 18 n = 14 n = 10 n = 14
working with government and
regulatory agencies
Training of managers and regional 16.7% 19.2% 23.3% 16.7% 12.5% 11.7%
staff in the internal rules of n = 20 n = 23 n = 28 n = 20 n = 15 n = 14
interaction with counterparties
Creation of alliances with other 23.3% 24.2% 15.8% 12.5% 9.2% 15%
companies in the region to counter n = 28 n = 29 n = 19 n = 15 n = 11 n = 18
unscrupulous actions by
representatives of the authorities or
the regulatory agencies
Use of the media to counter 25.8% 33.3% 11.7% 10% 5.0% 14.2%
unscrupulous actions by authorities n = 31 n = 40 n = 14 n = 12 n=6 n = 17
or regulatory agencies
Use of the courts to counter 29.2% 30.0% 10.8% 5.8% 10.0% 14.2%
unscrupulous actions by authorities n = 35 n = 36 n = 13 n=7 n = 12 n = 17
or regulatory agencies
Formal approaches to state officials 29.2% 32.5% 15.0% 3.3% 5.0% 15%
to counter unscrupulous actions by n = 35 n = 39 n = 18 n=4 n=6 n = 18
regional and community authorities
or regulatory agencies

According to the respondents, at the customs
office 2—3% of the total value of the imported goods
are paid; 10% of the monthly turnover is a common
bribe for the tax office; and the acceleration and
simplification of obtaining a license costs between
$100—200 USD.
3.3. Possible remedies
Do firms acknowledge the existence of corruption
and work to prevent it? Among all the named strat-
egies to mitigate corruption, the most frequently
used are (1) codes of corporate conduct, (2) inform-
ing counterparties on the rules and standards in
cooperation with contractors, (3) government and
regulatory institutions, and (4) training managers
and employees of regional departments on the
internal rules for cooperation with counterparties.
However, respondents indicated that these
strategies are ineffective. We found the following
practices common among respondents, with varying
levels of success:
1. Widespread use of contractors and subcontrac-
tors as a buffer strategy3;
3
The use of subcontractors, agents, and third parties to work
with regional authorities and regulatory agencies.
BUSHOR-1502; No. of Pages 13
Business corruption in Ukraine: A way to get things done?
Table 6. Definition of the term corruption
Question: “What does corruption mean for you?”
Definition In the first place
(choose one)
A necessity for business survival
A way of getting additional income
A crime
A part of doing business
A way of solving problems
Compensation for low income
A temporary situation
A tradition
A national peculiarity
Evil
State business
Politicians’ game
2. Court appeals to counter the unscrupulous ac-
tions of the regional authorities and regulatory
representatives seems to be the most productive
recourse; and
3. Planning an annual budget for the development
of informal relationships is ridiculous and unre-
alistic.
The most promising strategy for entrepreneurs is
forming alliances with other companies in the re-
gion to counter the unscrupulous actions of officials.
Such alliances (formal or otherwise) were viewed
positively and categorized as information sharing,
spreading specific details on main market players,
contractor recommendations, co-financing proj-
ects, etc.
Respondents regarded making an official appeal
to national representatives as a way to counter
officials’ unscrupulous actions as nonsense. The
appeal practice was argued against by noting
that “corruption’s legs in our country are growing
from the top” and “the fish rots from the head”;
thus, it makes no sense to promote such com-
plaints and appeals up the bureaucratic system
(see Table 5).
We asked our respondents to define corruption
(see Table 6). This question turned out to be the
most complicated from the position of choosing an
alternative and giving an unambiguous answer.
About 75% of the respondents complained about
the difficulty of making a choice and spent much
more time exploring the list of alternatives, even if
their formulating was not complicated.
11
In the second place
(choose one)
5.8% 6.7%
3.3% 5.8%
40% 12.5%
8.3% 0.8%
7.5% 10.8%
0.8% 3.3%
0.8% 7.5%
3.3% 20.8%
4.2% 5.8%
10% 10.8%
10.8% 11.7%
3.3% 3.3%
We observed a large number of respondents
with ambivalent attitudes toward corruption.
Corruption might be for them both a crime and
a tradition. The definition of ‘politicians’ game’
evoked, in different cases, irony, laughter, and
fatalism; “a way of solving problems” was men-
tioned most often with negative implications. “A
necessity for business survival” was accompanied
by complaints about the difficulties of doing busi-
ness on the domestic market, while “a national
feature” was met with condescension. Hope was
also expressed repeatedly concerning the tempo-
rality of this phenomenon.
4. Conclusion and outlook
Our studies underscored the fact that corruption
has a long history and tradition in Ukraine, as well
as in many other Eastern European countries.
Corruption is not always considered an obstacle,
at least not at the firm level: only 7% of the
respondents saw corruption as a systematic ob-
stacle for their business in 2013. Others replied
often (18%), sometimes (35%), seldom (23%), and
never (17%) to the question: How often does
corruption hinder the development of your busi-
ness? Compared to our 2013 survey, in 2015 the
number of CEOs and managers that considered
corruption as an obstacle to their development
almost doubled, reaching 43%. However, 57% of
respondents did not consider it to be a problem. It
seems that for many practitioners corruption can
be a helpful tool to optimize their own business
BUSHOR-1502; No. of Pages 13

12 E. Denisova-Schmidt, Y. Prytula

activities. This creates an ambivalent attitude

toward corruption (i.e., it can be both good and
bad at the same time). As long as such ambiva-
lence exists, fighting corruption will be problem-
atic, especially in the endemically corrupt
environment and the economic downturn that
Ukraine is currently experiencing.
Can anything be done about corruption at the
firm level in Ukrainian enterprises? Yes, if anti-
corruption measures would consider the functions
corruption serves and develop alternative solutions
based on this understanding (Marquette & Pfeiffer,
2015). Enacting business-friendly laws that simplify
bureaucracy, increase international exposure, and
focus the fight against corruption on specific prob-
lems such as kickbacks or conflicts of interest in
purchasing (Shekshnia et al., 2017) might be addi-
tional instruments to mitigate corruption.
Acknowledgments
This study was conducted with financial support
provided by the Center for Governance and Cul-
ture in Europe at the University of St. Gallen
(GCE-HSG), Switzerland. The sponsor influenced
neither the research design nor the interpreta-
tion of the results. The preliminary findings were
discussed at the at the 12th Annual Danyliw
Seminar, Chair of Ukrainian Studies, University
of Ottawa, 10—12 November 2016, and at
the 49th Annual ASEEES Convention, Chicago,
IL, U.S.A., 9—12 November 2017. We thank Dom-
inique Arel, Olena Kryzhko, Johannes Leitner,
Hannes Meissner, Natalka Patsiurko and guest
editors Joshua E. Perry and Hilary E. Kahn for
their valuable feedback.

Appendix. Firm characteristics

2013 survey (all Ukraine) 2015 survey (Western

Ukraine)
Firm size Small Medium Large Small Medium Large
Number of employees 29.14 97.20 655.08 13.72 108.41 545.60
Number of female employees 11.33 40.89 294.87 5.43 25.82 296.80
Change in the number of employees over 2.75 2.88 2.88 3.08 3.05 4.00
the last 3 years (1: reduced by more than
20%, 2: reduced by 5—20%, 3: did not
change, 4: increased by 5—20%, 5:
increased by more than 20%)
Year of firm establishment 1999.62 1995.12 1991.31 2005 2000.3 1997.78
Foreign ownership (binary) 0.02 0.08 0.12 0.06 0.14 0.40
Business-to-customer business model 0.76 0.73 0.69 0.89 0.82 0.60
(binary)
% products/services sold domestically 97.13 91.06 87.13 90.81 84.50 74.60
% products/services bought domestically 95.26 88.40 83.08 67.10 42.52 39.67
Business development in last 3 years (1: 3.27 3.52 3.63 3.55 3.23 3.60
very bad . . . 5: very good)
Business development expectations in 3.68 3.80 3.88 3.99 3.50 4.20
next 3 years (1: very bad . . . 5: very
good)
Corruption is a problem for development 2.79 2.80 2.69 3.14 3.40 2.90
(1: never . . . 5: systematically)
Number of observations 126 311 188 88 22 10
BUSHOR-1502; No. of Pages 13
Business corruption in Ukraine: A way to get things done?
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