Reviews and presents an overview of corruption research in international business, highlighting particular moderators such as trust, regime type, and learning.

1. Governance and Corruption in
International Business
Ilan Alon, Ph.D.
Professor of Strategy and Int Marketing, UiA, Norway
Editor, International Journal of Emerging Markets
Editor, European Journal of International Management

3. Selected Recent Papers on
Corruption and Governance
• Bahoo, S., Alon, I., & Paltrinieri, A. (2020). Corruption in international business: A review
and research agenda. International Business Review, 29(4), 101660.
• Jimenez, A., Puche-Regaliza, J. C., Jiménez-Eguizábal, J. A., & Alon, I. (2017). Political
discretion and corruption: the impact of institutional quality on formal and informal
entrepreneurship. European Journal of International Management, 11(3), 280-300.
• Alon, I., Li, S., & Wu, J. (2016). Corruption, regime type, and economic growth, Public
Finance and Management, 16 (4), 332-361.
• Li, S., Alon, I., & Wu, J. (2017). Corruption May Worsen in Democratizing Economies: But
Don't Let it Erode Our Faith in Democracy. Modern China Studies, 24(2).
• Sutherland, D., Anderson, J., Bailey, N., & Alon, I. (2020). Policy, institutional fragility, and
Chinese outward foreign direct investment: An empirical examination of the Belt and Road
Initiative. Journal of International Business Policy, 3(3), 249-272.
• Bahoo, S., Alon, I., & Paltrinieri, A. (2020). Corruption in international business: A review
and research agenda. International Business Review, 29(4), 101660.
• Bretas, V. P., Alon, I., Rocha, T. V., & Galetti, J. R. (2021). International governance mode
choice: Evidence from Brazilian franchisors. Journal of International Management, 27(2),
100851.
• Alon, I., Elia, S., & Li, S. (2020). Greenfield or M&A? An institutional and learning
perspective on the establishment mode choice of Chinese outward investments. Journal of
International Management, 26(3), 100758.

4. Outline
• What is governance/corruption?
• Relation-based vs. Rule-based Governance
• Corruption, Regime and Economic Growth
• Corruption in International Business
• Corruption and Global Entrepreneurship
• Corruption and FDI
• Governance/Corruption and Chinese investments
• Key lessons

5. Corruption Baseline
• Public officials sell a public good for private gain manifests
itself in different ways (bribes, red tape, organized crime,
unproductive behavior) and leads to reduced investment,
distorted public expenditures, social and economic failures,
economic instability and stagnation and squandered
entrepreneurial development (Park, 2003; Alon et al., 2016;
Cuervo-Cazurra, 2016).
• Element of institutional quality or governance environment
• The use of bribes does not guarantee protection or results for
those who pay (Yim et al., 2017).
• Given that this is an illegal activity in most countries, official
enforcement is difficult (Méon and Weill 2010).

7. 1. Voice and Accountability

8. 2. Political Stability

9. 3. Government Effectiveness

10. 4. Regulatory Quality

11. 5. Rule of Law

12. 6. Control of Corruption

13. Another way to think of
governance/corruption

14. Two major types of governance mechanism
14
Relation-based
Rule-based
Fair
and efficient
Governanc
e
environme
nt
Unfair and corrupt
governance
mechanism

15. 15
Relation-based Governance Rule-based Governance
Laws tend to be opaque and unfair,
enforcement particularistic
Laws tend to be transparent, fair, and
enforcement universal
Relying on private and local
information
Relying on public information
Implicit and non-verifiable
agreements
Explicit and third-party verifiable
agreements
Person-specific and non-transferable
contracts
Public and transferable contracts
High entry and exit barriers Low entry and exit barriers
Requiring minimum social order Requiring well-developed legal
infrastructure
Low fixed costs to set up the system High fixed costs to set up the system
High and increasing marginal costs to
maintain
Low and decreasing marginal costs to
maintain
Rely on particularized trust Rely on generalized trust

16. How to Measure a
Country’s Governance
Li and Filer (2007) developed a Governance
Environment Index (GEI) to measure the
degree to which a country is based on public
ordering (rule-based) versus private ordering
(relation-based).
The GEI consists of five indicators: (1) political
rights, (2) rule of law, (3) quality of accounting
standards, (4) free flow of information, and (5)
public trust.

17. Li and Filer 17
Country GEI Country GEI Country GEI
Norway 6.02 South Africa 1.37 Argentina -1.3
Ireland 4.69 Belgium 1.29 India -1.48
Sweden 4.61 South Korea 1.15 Greece -1.99
United States 4.47 France 1.09 Brazil -3.17
Netherlands 4.35 Austria 0.87 Venezuela -3.24
United
Kingdom 4.26 Italy 0.56 Philippines -3.39
Canada 4.1 Poland 0.56 Indonesia -3.71
Denmark 3.82 Spain 0.11 Pakistan -4.72
Australia 3.49 Czech. -0.03 Morocco -4.78
Finland 2.9 Portugal -0.06 Egypt -4.81
Iceland 2.85 Hungary -0.06 Turkey -5.04
Japan 2.7 Chile -0.15 Russia -6.23
Taiwan 2.45 Peru -0.33 Iran -6.27
Germany 1.94 Mexico -0.36 China -7.26
Switzerland 1.52 Israel -0.53

18. --When most transactions are based on
impersonal and explicit agreements, and the
state can impartially enforce contracts, we call
it “rule-based governance” system.
– To be effective, it needs well-established
information infrastructure at the micro-level
(accounting, auditing, notary, rating agencies, and
legal cases and codes).
18
Rule-based Governance

19. --When most transactions are based on personal
and implicit agreements, and the state is
generally not able to enforce contracts impartially.
• Relation: two parties share certain relevant
private information about one another locally:
– Ex ante monitoring information: credit history and
reputation
– Interim monitoring information: financial status and
profit prospects
– Ex post monitoring information: identity and assets.
19
Relation-based Governance

20. Rule-based
Relation-based
Average
transaction
costs
Scope and scale of the market
Turning point
Before the turning point, the relation-based way of doing business is more efficient.
But as the market expands beyond the turning point, the rule-based way of doing
business becomes more efficient, forcing relation-based businesses to change into
rule-based businesses.
Cost
gap
Cost
gap
31

21. Trust and governance
• Trust:
– "a generalized expectancy held by an individual
that the word of another...can be relied on."
(Rotter, 1967, p. 651).
• Generalized Trust
– Most people can be trusted, including strangers.
• Particularized Trust
– Trust can only be applied to specific individuals or individuals
associated with a certain network or group
» family members, relatives, friends or members of one’s
organization.
21

23. Literature Review
• The Effect of Corruption on Growth is
Inconsistent
– Some finding positive
– Some finding negative
– Some finding no impact
• The Effect of Democratization is Inconsistent
– Some argue positive
– Some argue negative
– Some find no impact
• Putting Regime Type and Corruption together can
explain economic efficiency

24. Corruption and economic development
Dominant
economic theory:
corruption is bad
for economic
development (see
review article by
Svensson, 2003).
24

25. Corruption and economic growth
The empirical
evidence on the
corruption-efficiency
relationship is mixed.
25

26. Why some countries thrive despite corruption?
• How do we explain China?
• The “East Asian paradox” (Rock & Bonnett,
2003)
26

27. Attempt to solve the puzzle
• “Predatory” corruption vs. “efficiency enhancing”
corruption
• Past attempts to solve the puzzle
– The “efficiency enhancing” corruption argument (Leff,
1964; Lui, 1985, Wedeman, 2002).
• Resolving the conflict:
– Corruption in relation-based society
– The role of regime type
• Democracies (rule based)
• Anocracies (relation based, low trust)
• Autocracies (relation based, high trust)
27

28. Regime Types
• Type 1 (Autocracies): dictatorship (one big mafia).
– Ex. Vietnam, China, Oman, Iran
– Authoritarian maximize total bribes
– Relationship based, high trust (in such a regime, the bribe target is clear,
and the delivery of goods to the briber is secure)
• Type 2 (Anocracies): multiple independent agencies (many small mafias)
– Ex. Russia, Sudan, Venezuela, Nigeria, Indonesia
– Relationship based, low trust (incomplete democratization, transition)
– Weak central government and many agencies that control complementary
government goods
– Each agency maximizes its own bribe independent of other agencies and
collectively they can drive bribes prohibitively high to stifle growth
– In general, countries in which the totalitarian regime is falling
• Type 3 (Democracies): characterized by checks and balances in the government
that substantially reduces or minimizes monopoly in key government services.
– Checks and balances
– Rule-based societies, high trust (Ex. EU, USA, Australia, Japan)
28

29. 29

30. Policy and strategic implications
• What should the government do?
– Impact of corruption by regime type
– Transition not unidirectional: Ukraine, Egypt
– Minimize disruption through transition to anocracies
• What should firms do?
– Understand the three regimes types well
– Be prepared for governance vacuum
– Be aware of the declining of the effectiveness of
personal relations
30

37. Political Discretion
• The Political Constraint Index (POLCONV) devised by Henisz (1998) is used to
measure the degree of political discretion. This index measures regulatory
discretion by taking into account the number of independent authorities with veto
power in each country (for example executive, legislative, judiciary, and
administrative).
• Moderates the effect of corruption on entrepreneurship

38. Vexing Question
• Does corruption dissuade FDI?
• Does corruption dissuade Chinese
investment?

39. 39
“官出数字，数字出官”
“The officials make the numbers,
the numbers make the officials.”

40. 40

42. Establishment Mode
• Greenfield investments are preferred over
acquisitions in relation-based host markets, and
M&As are preferred in rule-based countries.
• International depth (i.e. previous investments in
the same host market) moderates the effect of
the governance environment on the
establishment mode: firms with greater
international depth use more M&As in relation-
based markets, suggesting this type of learning
reduces acquisition uncertainty.

43. Largest SOE Motivations for OFDI
Alon, I., Wang, H., Shen, J., & Zhang, W. (2014). Chinese state-owned
enterprises go global. Journal of Business Strategy, 35(6), 3-18.

44. Chinese Investment and Economic
Freedom

45. Journal of International Business Policy

46. Governance, Foreign Aid, and COFDI

48. Lessons
• In democratizing economies corruption can get
worse before getting better
• Trust moderates and sometime enhances the
efficiency of corruption
• Political discretion and relation-based societies
can enhance corruption
• Corruption can come from the government to
individuals
• China’s governance is incompatible with
international rule of law
– Rule of Law vs. Rule by Law

50. Questions and Answers