Corruption Across Borders

Definition of Corruption

Concerns about business ethics, social responsibility and corruption are not new to management literature. However, the impact that national culture may have on ethical practice has been largely unexamined. For the purpose of this discussion we define corruption as: “the misuse of entrusted power for private benefit” (Transparency International Sourcebook 2000, pg. 13[1]). Examples would be conflicts of interest and nepotism by those responsible for making objective decisions in the service of an organization or a government agency. This definition of corruption is generally accepted around the world.

Cultural Tolerance of Corruption

Different cultures, however, have varying degrees of tolerance for corruption. For instance, some cultures will ignore the use of “consultation fees” that would violate the U.S. Foreign Corrupt Practices Act. This “tolerance” does not change what is understood as corruption in those nations; it only changes people’s willingness to accept various forms of corruption in others and in themselves. In these settings, various forms of corruption, such as consultation fees, are perceived as “necessary” though not desirable to conduct business. The controversy in defining corruption has existed for decades and has only increased with the growth of global trade. For a discussion of corruption, its definitions and issues related to its control see Heidenheimer (1970)[2], Klitgaard (1991)[3], Heywood, 1997)[4], and Rose-Ackerman (1999)[5].

To what extent does culture within a country influence the behavior of its political leaders and business practitioners? In this article, we will explore the relationship between national culture and perceptions of corruption within cultures and offer recommendations for the business practitioner. We will also describe and define the measures used in our examination of issues, present a statistical analysis, and discuss the results and implications of our findings.

The culture data that we refer to in this article were adapted from the GLOBE Study (Global Leadership and Organizational Behavior Effectiveness).[6] The sample consisted of 17,370 middle managers from 62 different societies and cultures collected from 951 organizations that were represented in one of three industries: food processing, financial services and telecommunication services. These types of organizations were selected because they represented industries found in all 62 societies and were sufficiently different from one another that they presented an opportunity to capture information from disparate types of businesses (House, et al., 2004)[7]. Culture within each of these countries was measured along the following nine dimensions:

Uncertainty avoidance: The extent to which members of an organization or society strive to avoid uncertainty by relying on established social norms, rituals and bureaucratic practices. For example, organizations that have detailed policies and procedures would be described as demonstrating a high degree of uncertainty avoidance.

Power distance: The degree to which members of an organization or society expect and agree that power should be stratified and concentrated at higher levels of an organization or government. Decision making retained at senior levels is an example of high power distance, while delegation of key decisions would indicate a low level of power distance.

Institutional Collectivism: The degree to which organizational and societal institutional practices encourage and reward collective distribution of resources and collective action. For example, incentive packages that offer rewards linked to team rather than individual performance suggest a more collective culture.

In-Group Collectivism: The degree to which individuals express pride, loyalty, and cohesiveness in their organizations and families. Organizations in which members hold loyalty more to the organization rather than to personal gain would be an example of high in-group collectivism.

Gender Egalitarianism: The degree to which an organization or a society minimizes gender role differences while promoting gender equality. Gender egalitarianism is high when both men and women have equal opportunity for promotion.

Assertiveness: The degree to which individuals in organizations or societies are assertive, confrontational, and aggressive in social relationships. Assertiveness is considered high when members are expected to put forth their point of view.

Future Orientation: The degree to which individuals in organizations or societies engage in future-oriented behaviors such as planning, investing in the future, and delaying individual or collective gratification. Focus on long-term organizational objectives is an example.

Performance Orientation: The degree to which an organization or society encourages and rewards group members for performance improvement and excellence. An environment in which favorable results are expected offers an example of a high performance culture.

Humane Orientation: The degree to which individuals in organizations or societies encourage and reward individuals for being fair, altruistic, friendly, generous, caring and kind to others. This dimension is evidenced by a focus on social responsibility, public service, and an expectation that members work well with others.

Eighteen scales were used to measure practice versus values that comprise each culture. Subjects in half of the sample from each country were instructed to consider their organization in assessing each scale; the other half were asked to consider their society. Therefore, the GLOBE methodology expands cultural understanding by measuring both what is valued in the culture and what is actually practiced.

Understanding the extent to which national culture influences ethical behavior may be valuable for organizations to consider when doing business across borders. If, indeed, culture impacts business practice—particularly acts of corruption in business—knowledge of this relationship would be advantageous in determining whether or not to enter a particular international market.

Corruption Perceptions Index (CPI)

Transparency International (TI) is a not-for-profit non-governmental organization founded in 1993 to address the issue of corruption at the national and international levels. TI assesses corruption internationally through the use of an index of surveys conducted by a coalition of independent institutions from around the world. The index of particular interest for this study is the Corruption Perceptions Index (Transparency International CPI, 2003).[8] The CPI charts the level of corruption in 133 of the world’s 200 sovereign nations based on the results of 17 surveys from 13 independent institutions that collect data on corruption around the world.

To assure current information, the CPI is a “rolling survey of polls” about perceptions of corruption provided to TI by other institutions. The CPI 2003 used in the study on which this article is based was compiled from surveys collected between 2001 and 2003. Only the 133 countries that were represented in at least three of the 17 surveys used as a basis for CPI 2003 are included in the report.

The Culture/Corruption Relationship

In our study, a regression analysis was used to examine the relationship between national culture (using the nine dimensions of the previously cited GLOBE study) and perceptions of corruption (measured by the CPI). The data were examined using the GLOBE dimensions as the independent variables and the CPI as the dependent variable. A second-order linear regression with a 95 percent confidence level was run on each of the nine dimensions and their subsequent sub-categories.

An argument can intuitively be made that would suggest societies/organizations with high power distance, individualistic practices or low future orientation would be highly susceptible to corruption. However, the only significance appeared with respect to Uncertainty Avoidance. That is, the greater the Uncertainty Avoidance (as exemplified by societies or organizations with specific policies and procedures for conduct), the less likely corrupt practices will occur. While it is surprising that only Uncertainty Avoidance emerged in the analysis, it is notable that the relationship is significant for all three subscales—what is valued, what is practiced and the difference between the two.

This analysis provides some insight regarding the possible impact of country culture on levels of corruption that occur within a given society. The GLOBE Study defines Uncertainty Avoidance as: “…the extent to which ambiguous situations are threatening to individuals, to which rules and order are preferred, and to which uncertainty is tolerated in society (House, et al., 2004, p. 602),” and “…the extent to which members of collectives seek orderliness, consistency, structure, formalized procedures, and laws to cover situations in their daily lives.”[9] In addition, one of the GLOBE Study’s hypotheses (Hypothesis 8.3) states: “…countries that are high on uncertainty avoidance tend to have governments that support economic activities.”[10] The results of the regression analysis in the current study support that hypothesis. House, et al. conclude that: “…in uncertainty-avoiding societies, the public sector is able to function without much political interference and there is relatively less bribery and corruption.”[11]

These conclusions suggest that corruption may act as a substitute for fair business practices and a well-enforced legal environment, especially in societies in which a large gap is perceived to exist between the degree of uncertainty avoidance desired (valued) and the uncertainty avoidance provided by the legal structure on commercial and public sector activities (practice). It is generally accepted that economic risk and uncertainty increase the cost of business transactions and lead to expectations of higher returns to compensate the firm or entrepreneur for that risk. An alternative to achieving a higher return can be an attempt to reduce uncertainty through practices such as bribery, fraud, and political corruption (through donations to political campaigns aimed at establishing a quid pro quo relationship with the politician or political party).

Clearly, if a relationship exists between uncertainty avoidance and corruption, policy makers should seek to understand and to reduce corruption. A starting point for policy makers seeking to do both may be developing an understanding of the society’s collective and individual desires for uncertainty avoidance and the policy makers’ perceptions of the degree to which uncertainty-avoidance practices exist in their culture. It appears that values may have a significant impact on either facilitating or restraining the practice and acceptance of corruption in private and public sector transactions. Recognition of such effects and the degree of their impact on the behavior of both individuals and organizations can also act as predictors of potential ethical issues within certain national environments. As predictors, cultural variables can also serve as guidelines for anticipating potential ethical issues within specific cultural environments, for developing practices and policies to mitigate corruption, and for helping individuals and organizations to design strategies for dealing with these corrupt practices.

Application to Practice

Based on the results of our study, we offer the following recommendations for organizations when considering doing business across borders:

1. Due diligence using the data from Transparency International would be a good starting point. The table below lists the countries in the top ten and bottom ten from the 2003 TI research.[12] Organizations should ensure that they are well informed about the ethical climate of the country in which they plan to do business and ways in which the local culture may affect local business tolerance for corruption.

Corruption Perceptions Index

2. Managers may gain particular insight by better understanding and recognizing the practice and value of uncertainty avoidance, not only across borders, but also within the manger’s own organization. That is, if indeed, low uncertainty avoidance is a precursor of the possibility of corrupt practices, perhaps the initial act of any manager should be to carry out an investigation of the extent to which policies and procedures within the firm are sufficient to deal with the possibility of unethical corporate behavior. Such an investigation would allow the firm to use internal controls to compensate for the lack of regulatory or social controls in the business environment. It might also have implications for better estimating the risk involved in specific business ventures and the resultant hurdles the firm needs to overcome if it does not engage in the same practices as its competitors.

3. Organizations should take culture’s impact on corruption into consideration when designing orientation programs for their expatriate (overseas) managers and training for local managers and employees. An understanding of the relevant aspects of local culture and how that culture is either complementary or contradictory to organization values can help employees to better anticipate the kinds of ethical issues they may encounter and assist them in developing strategies, a priori, to deal with them.

4. An understanding of culture can provide guidance to the policies, procedures, and codes of conduct needed to prevent breaches in ethics. Such knowledge can also help in designing the best way to communicate and enforce ethical standards in ways that recognize local norms and customs. This knowledge can assist international agencies such as The World Bank and the International Monetary Fund in designing policies and procedures that will encourage ethical behavior and reduce levels of corruption in the projects that they support and fund.

Summary

As our world economy becomes more global in nature, and as firms increasingly operate across national as well as cultural borders, the need to understand and deal effectively with varying levels of both the practice and acceptance of corruption will become increasingly important. Such understanding can also help national agencies, international agencies and non-governmental organizations in developing their own strategies for moving toward a world that is freer of corruption at the organizational as well as the national level.

While the conclusions of this study are preliminary, they suggest a potentially fruitful line of inquiry for understanding the impact of culture on business practices in general and on corruption in particular. The GLOBE study and the Corruptions Perception Index together provide a robust set of data on which to build such inquiries.

[1] Pope, Jeremy, Confronting Corruption, The Elements of a National Integrity System (Transparency International Sourcebook 2000, 3rd Edition), p. 13.

[2] Heidenheimer, A., Political Corruption: Readings in Comparative Analysis. (New York: Holt, Rinehart & Winston, 1970).

[3] Klitgaard, R., Controlling Corruption (Berkeley: University of California Press, 1991).

[4] Heywood, P., (Ed.). Political Corruption (Oxford: Blackwell, 1997).

[5] Rose-Ackerman, S., Corruption and Government: Causes, Consequences, and Reform (Cambridge: Cambridge University Press, 1999).

[6] House, R., Hanges, P., Javidan, M., Dorfman, P., and Gupta, V., Culture, Leadership and Organizations: The GLOBE Study of 62 Societies (Thousand Oaks, CA: Sage, 2004).

[7] Ibid.

[8] Transparency International CPI 2003, see http://www.transparency.org/cpi/index.html#cpi

[9] House, R., Hanges, P., Javidan, M., Dorfman, P., and Gupta, V., Culture, Leadership and Organizations, p. 603.

[10] Ibid.

[11] Ibid, p. 630.

[12] Transparency International CPI 2004 was released after this article was written and shows changes in the rankings for several countries. http://www.transparency.org/pressreleases_archive/2004/2004.10.20.cpi.en.html.

Other references include:

Foreign Corrupt Practices Act of 1977, see: http://www.usdoj.gov/criminal/fraud/fcpa.html.

Hall, E., and Hall, M., Understanding Cultural Differences: Germans, French and Americans (Yarmouth, ME: Intercultural Press, 1990).

Heidenheimer, A., Political Corruption: Readings in Comparative Analysis (New York: Holt, Rinehart & Winston, 1970).

Heywood, P., (Ed.). Political Corruption (Oxford: Blackwell, 1997).

Hofstede, G., Culture’s Consequences: International Differences in Work Related Values, 2nd edition (Thousand Oaks, CA: Sage, 2001).

Klitgaard, R., Controlling Corruption (Berkeley: University of California Press, 1991).

Kluckhohn, F., and Strodtbeck, F., Variations in Value Orientations (Evanston, IL: Row, Peterson, 1961).

Landsdorff, J., “Corruption Perceptions Index,” Global Corruptions Report, 2004 (Pluto Press: London, 2004).

Putnam, R., Making Democracy Work. (Princeton, NJ: Princeton University Press, 1993).

Rose-Ackerman, S., Corruption and Government: Causes, Consequences, and Reform (Cambridge: Cambridge University Press, 1999).

Schein, E., Organizational culture and leadership, 2nd edition (San Francisco: Jossey-Bass, 1992).

Schwartz, S., “Beyond Individualism-Collectivism: New Cultural Dimensions of Values,” in U. Kim, H.C. Triandis, C. Kagitcibasi, S.C. Choi & G. Yoon (Eds.), Individualism and collectivism: Theory, method and application. (London: Sage, 1994).

Smith, P., “Culture’s Consequences: Something Old and Something New.” Human Relations, (2002) 55, 119-124.

Smith, P., and Schwartz, S., “Values,” in Berry, J., Segall, M., & Kagitcibasi, C., (Eds), Handbook of Cross-Cultural Psychology, Vol. 3, pp 77-118, (Boston: Allyn & Bacon, 1997).

Transparency International Strategic Framework, 12 January 2004.

Triandis, H., Individualism and Collectivism (Boulder, CO: Westview, 1995).