Corruption Across Countries: The Cultural and Economic Factors

Corruption Across Countries: The Cultural and Economic FactorsAuthor(s): Rajib N. Sanyal and Subarna K. SamantaSource: Business & Professional Ethics Journal, Vol. 21, No. 1 (Spring 2002), pp. 21-46Published by: Philosophy Documentation CenterStable URL: http://www.jstor.org/stable/27801269 .

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BUSINESS & PROFESSIONAL ETHICS JOURNAL, VOL. 21, NO. 1

Corruption Across Countries: The Cultural and Economic Factors

Rajib N. Sanyal and Subarna K. Samanta

Introduction

The issue of corruption among government officials and politicians has

received heightened attention in recent years. Corrupt practices pose a

threat to the ethical conduct of international business and create various economic and social problems. While corruption appears to be a worldwide

phenomenon, evidence indicates that incidences of corruption vary across

countries. A range of measures is being adopted by governments, busi

nesses, and advocacy groups to eliminate or reduce corrupt conduct. This

study was conducted against this background to ascertain what societal and

economic factors are related to corrupt practices in a country as they affect

international business transactions and what explains the variation in cor

ruption across countries. An understanding of these relevant factors can

assist policy makers and businesspersons in their efforts to combat

corruption. A general definition of corruption is: the misuse of public power for private benefits. Such misuse takes place in the form of bribing public officials, kickbacks in public procurements, and embezzling public money,

among others. In this paper, we consider corruption?both petty and

grand?in the context of conducting international business. Thus, our focus is on the level of corrupt practices that business organizations experience

while doing business in foreign countries.

? Business & Professional Ethics Journal 2000. Correspondence may be sent to Rajib N. Sanyal or Subarna K. Samanta, School of Business, The

College of New Jersey, P.O. Box 7718, Ewing, NJ 08628-0718; or email:

Rajib Sanyal at [email protected], or Subarna Samanta at ssamanta@ tcnj.edu.



22 Business a Professional Ethics Journal

Corruption in International Business

The primary form of corruption discussed in this paper is bribery?both in cash and in kind. In recent years, corruption in government?among public officials and politicians?has come to be seen as a major social and economic problem. Although individuals have argued that corruption contributes to economic development by removing hindrances to doing business, by encouraging competition for scarce resources, and by making available resources (the corruption proceeds) for investment in (hopefully) productive enterprises, the opposite views are more compelling (Rose Ackerman, 1997). Corrupt practices undermine public and business

confidence, breed cynicism, increase inefficiency, and leads to other crimes such as money laundering (Theobald, 1990). Honest businesses lose out in

obtaining contracts because of their refusal to acquiesce to corrupt practices. Corruption also adds to the costs of doing business and poses difficult ethical dilemmas and legal problems for businesses (Aides and Di Telia, 1996, Donaldson, 1996). Extensive corruption tends to depress investment and economic growth (Mauro, 1995).

International firms feel the need to engage in and justify corrupt

practices for at least three reasons (Carmichael, 1995). First, in some

countries normal business transactions cannot be initiated or completed without paying bribes. The firm may justify such conduct on the grounds of business necessity and that it is merely doing what is the norm in that

country. Such a situation existed in Russia, as a press release by the American Chamber of Commerce in Russia (1995) noted: "While the

practice of payoffs has traditionally been quite common in Russia, in recent

years it has become so widespread and grown to such proportions that it has become a real and consequential hurdle to those Western companies seeking to invest." Second, although a firm may recognize corrupt practices as

morally wrong, it may yet engage in them because "everybody does it."

Third, firms with a desperate need for business may resort to unethical

practices to obtain it. There is a growing body of evidence that indicates that firms that

tolerate corruption abroad by their employees are engaging in risky behavior

(Pittman and Sanford, 1994, Sterling, 1994, Beaty and Gwynne, 1993). "Off the books" accounts, secret bank accounts, paying staff while they serve prison terms, and using former senior staff as "middlemen" all create a working environment in which business expediency undergirds criminal



Corruption Across Countries 23

activity. More critically, firms may find themselves violating national laws

or international treaties and therefore liable to prosecution. In 1977, following the exposure of a bribery scandal involving the

American aerospace company, Lockheed's efforts to sell its airplanes to

foreign governments, the United States passed the Foreign Corrupt Prac

tices Act (FCPA) (Pitman and Stanford, 1994). Congressional hearings

preceding the enactment of the law and investigation by various government

agencies led about 450 companies, including more than 100 of the Fortune

500, to admit making questionable payments, totaling over 300 million dollars. The FCPA made it a crime for any American firm (and foreign firms

which issue negotiable securities on American stock exchanges) to offer,

promise, or make payments or gifts of anything of value to foreign officials,

politicians, and political parties with the intention of changing policies or to

secure the suspension of a legal norm. An amendment to the law in 1988

allowed certain forms of bribery (www.usdoj.gov/criminal/iraud/fcpa/

hisindx.htm). The amendment clarified what types of bribes are permissible and who may receive them. For instance, payments made to speed up gov ernmental actions by lower level officials are legal. Such "grease payments"

may be made to hasten the installation of telephones, improve mail pickup and delivery, or accelerate loading and unloading of cargo. In contrast, a

payment or gift to a foreign government official to obtain a government contract is, by definition, illegal.

In 1996, the Inter-American Convention against Corruption was

adopted by 25 countries in North and South America (www.oas.org/

oasnews). It was the first anti-corruption treaty in the world. In its

preamble, the Convention frames the problem of corruption as a threat to

democratic institutions, economic stability, and moral well-being. The

Convention requires signatory countries to adopt laws criminalizing certain

activities, including the acceptance or solicitation of bribes by public officials and allow the extradition of corrupt officials to other countries for

prosecution.

Largely because of American initiatives, 34 countries, many of them

belonging to the Organization for Economic Cooperation and Development,

signed the first Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, which came into effect at

the end of 1998. The Convention made the bribing of foreign public officials to win or retain business, a criminal offence and established procedures that



24 Business & Professional Ethics Journal

firms can follow to ensure compliance. In addition, firms in treaty countries can no longer deduct the bribes they pay to foreigners from their national tax

returns, which were allowed by the tax laws in several countries (www. transparency.de/documents/, Andelman, 1998).

In addition to national laws and international agreements, opposition to corrupt practices has emerged from various sources. Development agencies such as the World Bank, Asian Development Bank, and Interna tional Monetary Fund (IMF) have linked aid disbursements to improvements in administrative practices to eliminate corruption (Lewis, 1997). For

instance, at the insistence of the IMF, which had suspended loans to Kenya largely over corruption issues, the Kenyan government established an anti

corruption body {The Economist, 1998). Monitoring groups such as the Berlin-based Transparency International, through its annual rankings draw

negative media attention to corrupt nations. As democratic practices have

spread, opposition political parties in many countries have demanded greater openness in the awarding of contracts and the media have reported unethical conduct by public officials. Because of pressure from watchdog groups and attendant negative publicity, some firms have become more conscious of their ethical conduct. Overseas banks, which have often been used by bribe

recipients to keep such money, have been forced to disclose such accounts and freeze them on the order of courts. The International Chamber of Com merce has created the Rules of Conduct to Combat Extortion and Bribery for

voluntary acceptance by business firms (Yannaca-Small, 1995). In general, the current worldwide effort to combat corruption has relied

on the work of non-governmental organizations to publicize corrupt prac tices, educate various stakeholders about the nature and effects of corrupt practices, and recommend non-statutory reforms to reduce corruption levels in individual countries. In addition, multilateral and national legal regimes are being strengthened by making certain conducts illegal, imposing stricter

penalties, improving accounting and disclosure requirements, reforming administrative practices such as those relating to the awarding of licenses, incentives, or contracts, require proper recording of transactions, and en

hanced cooperation among national law enforcement officials (Lambsdorff, 1998). Laws such as the FCPA in the U.S. have led to heightened aware ness about what is permissible and what is not permissible in international commerce and probably resulted in a decline in the most egregious forms of

corrupt conduct. While there is some evidence that corruption may be




lessening because of the pressure to introduce structural reforms and legal solutions, policy makers need to be aware of the influence of other factors

such as economic conditions and cultural peculiarities in a country.

Factors Associated with Corruption

Corruption exists to some extent in all countries. Since governments control

the distribution of valuable benefits and the imposition of costs, private individuals and businesses that want favorable treatment may be willing to

pay for them. Corruption occurs when illegal payments are made to the

agents of the state?bureaucrats, politicians, and judges?to obtain benefits

or avoid costs. These illegal payments affect the behavior of both the payers and recipients and may undermine public interest. Based on a review of the

literature we can identify three distinct, yet related, sources of corruption in a society.

Economic Factors

Studies show that bribery is likely to occur under specific legal and

institutional conditions (Rose-Ackerman, 1997). One such situation would

be a case of the government using legal criteria rather than willingness to

pay as the means to allocate a scarce benefit. Similarly, higher taxes, customs duties, and regulations provide incentives for bribery to take place as a way to lower the costs of doing business (Besley and McLaren, 1993). Officials in the public sector who are paid low salaries and yet are in

positions that control the transfer of large financial benefits to private firms

through procurement contracts, privatizations, and the award of concessions

are likely to be susceptible to asking for and receiving bribes (Rijckegham and Weder, 1996). In contrast, it can be argued that public officials who are

remunerated handsomely may be less likely to be tempted by bribes or other

illicit offers of payment. While corruption is often associated with

developing countries, surveys indicate that poor economic conditions by themselves do not fully explain corrupt conduct (Mauro, 1995). According to Mauro, a high level of corruption deters foreign investment in a country and as a consequence of which economic development is stunted. Reports of corrupt business deals involving government procurement come from

advanced countries such as Italy, as well as developing nations such as

Indonesia. However, in some countries, certain economic and institutional




factors may limit the ability of government officials to demand bribes. These

countervailing factors include higher levels of education, earnings, and

urbanization, and a free press, among others (Alam, 1995).

Cultural Factors

Aspects of a society's culture may also affect the propensity for and toler ation of the people for corrupt conduct. Many studies have pointed out

considerable differences among national cultures and how in turn, these

differences, affect the people's values, outlook, and behavior (Kluckhohn and Strodtbeck, 1961, Hall 1976, Hofstede, 1980, Ronen and Shenkar,

1985). The cultural differences impact how particular societies view

competition, material wealth, equity and fairness, and attitude towards

change, among others. For instance, Morishima ( 1982) noted the role of the Confucian ethic in the traditions of the Japanese officialdom. Reforms are

difficult to introduce in societies where there is strong belief that traditions will continue to endure. In Latin America, cultural explanations of

corruption tend to adhere to two well-established theories of criminal behavior. One view holds that officials adhere to a unique value system which endorses, instead of condemning, corrupt behavior. A corrupt official is admired as a smart fellow. Another view says that because of their

intimate, small-group interaction and association with corrupt officials, individuals engage in similar behavior. The popular observation is that since the big fish are biting, one should expect the smaller fry to get into the act too (Maingot, 1994).

However, relatively few studies have empirically tested the association of culture to corrupt practices in countries. A study by Tsalikis and Nwachukwu (1991) found that Nigerian and American business students' view of corrupt practices was influenced by their cultural backgrounds. One

by Husted (1999) described the cultural profile of a corrupt country as one

where people are highly risk averse, masculine, and have a large power distance.

Culture has been defined in many ways. One of the earliest and widely cited definitions, offered by Edward Taylor (1871), described culture as "that complex whole which includes knowledge, belief, art, morals, law, custom, and any other capabilities and habits acquired by man as a member of society" (page 1). One aspect of culture that is worth bearing in mind is that it is transmitted through the process of learning and interacting with




one's environment and that people are not born with culture specific genes.

Today, there are thousands of culturally distinctive groups living in 185

sovereign countries. While some countries are largely monocultural (e.g. South Korea), many others have within their borders a variety of cultural

groups (e.g. the United States). In these multicultural countries, some

cultural traits are dominant and, in any case, cultural values are often closely identified with the people of a particular country or region of the country.

Other Factors

In addition to economics and culture, the level of corruption is also

associated with other factors such as the political and legal structure in the

country, the severity of the penalties for corruption, and the credible

enforcement of such penalties. In kleptocracies, where corruption is

organized and rampant at the upper echelons of the government, laws to

prosecute corrupt behavior may not exist or are unenforceable. In other

countries, corruption might be more widespread where the illicit behavior

of some encourages others to do the same since there may be no sanctions

for engaging in such behaviors (Rose-Ackerman, 1997). Thus, a basic

condition for corruption control is a viable legal framework that enforces the

law without favoritism or arbitrariness. Tough laws are not sufficient in and

of themselves. Many countries have exemplary formal statutes but they are

seldom enforced. An independent judiciary can help greatly in controlling

corruption. As indicated in the previous section, international agreements and treaties are a new development in creating a legal basis to criminalize

corrupt behavior in international business transactions.

Sometimes, countries undergo such radical economic and political

changes (e.g. conditions in Russia and Eastern Europe following the fall of

communism), that the established legal and social order breaks down,

creating uncertainty, which in turn, leads corrupt practices to flourish

(Coleman, 1997, Puffer and McCarthy, 1995). For instance, the American

Chamber of Commerce in Russia noted in one of its circulars, "The number

of signatures, certificates, and licenses necessary is in itself daunting. Now,

however, each seems to have an unofficial price tag attached to it, most of

which are insignificant" (American Chamber of Commerce in Russia, 1995). A hypothesis that a country with an oversized government may be more

corrupt (because of the enormous opportunity available to officials to




regulate the availability of opportunities to businesses) was, however, not

found to be statistically significant (Husted, 1999). The economic, cultural, and legal factors work by themselves or

together to affect levels of corruption in a country. Corruption tends to be more pervasive in less developed countries, especially those with a recent

colonial past. Theobald (1990) believes that in such countries the full

bureaucratic apparatus of the modern state has been introduced with little

regard for the limited capacity of the economy to sustain it. Government

officials have heavy responsibilities and much social status but often, their

salaries are very low in comparison to their social and familial obligations. The need to maintain status and the heavy burden of traditional obligations encourage corrupt behaviors. Thus corruption is the result of a combination

of opportunity (that comes from the office being held) and personal and

familial obligations. In addition, the high cost of enforcing rules relative to

the available resources as well as the reluctance of people in power to

prosecute corrupt acts (being corrupt themselves) allows such behaviors to

persist.

Laws and penalties, economic conditions, and cultural characteristics are the determinants of corrupt behavior in a country. This research was

conducted to examine the role of cultural and economic factors as determi

nants of levels of corruption in individual countries.

Scope and Focus of the Study

This paper examines the relationship of economic and cultural factors to

levels of corruption in particular countries as perceived by international

business managers doing business with the governments of those countries.

Thus, the study did not look at corruption per se in a country or varieties of

corruption or the political/legal relationship to corruption. Many studies

have examined the political characteristics of the nation-state and its

relationship to corrupt practices vis-?-vis international investors. This study also does not look at corruption in the home countries of the foreign firms.

Although corruption, as studied here, involves two parties?the host

government and a foreign firm?this study looks only at the corruption levels in the host government and only as it pertains to conducting business.

The study sought to address the following questions:

(a) To what extent are cultural characteristics of a country related to levels of governmental corruption in a country?




(b) Are particular cultural characteristics of a country related to levels of corruption in a country?

(c) To what extent are economic conditions in a country related to levels of corruption in a country?

(d) Are particular economic conditions in a country related to levels of corruption in a country?

(e) What are the implications of the findings for international

managers and policy makers concerned with controlling corruption?

Research Hypotheses

Based on a review of the literature a set of hypotheses were developed and

statistically tested. The results comprise the basis of this study?identifying the factors that affect corruption levels in a country. Of the seven hypothe ses, four are related to culture, and three to economic variables. The hypo theses are presented below. It should be noted that this research does not

suggest that culture and economics cause corruption, instead it is argued that these variables are associated with corruption. It is possible that cultural and economic variables in a country could be affected by corruption.

The cultural variables are drawn from the seminal study by Hofstede

(1980) who surveyed 116,000 employees of IBM, an American multina tional firm, about their values and beliefs. These employees were located in 50 countries and 3 regions worldwide. Hofstede's research represents the

largest and most influential effort to cluster countries by cultural values. Based on the analysis of the survey results, Hofstede identified four dimensions of national culture: (1) Power Distance, (2) Individualism and

Collectivism, (3) Masculinity and Femininity, and (4) Uncertainty Avoid ance?and reported indices or scores for each of the countries/regions.

Power Distance refers to the extent to which people in a country can

accept large differences in power between individuals and groups in society. People in low Power Distance cultures are more likely to fear the concentra tion of power. In such societies, managers, administrators, and the ruling sections develop close, trusting relationships with their subordinates and those lower in the hierarchy, and tend to use power more carefully. The exercise of power in such societies is usually constrained by laws, proce dures, and standards. In contrast, in high Power Distance societies, people are more accepting of their place in the larger scheme of things. Individuals




in such countries tend to agree with the claim that, "some individuals are

destined to be leaders, others are not." Such societies are more hierarchical where unequal distribution of power is accepted. Hofstede found that

Anglo-Saxon countries (e.g., U.K., U.S., and Australia) had low Power Distance scores whereas countries such as Mexico, Philippines, and Venezuela had high Power Distance scores.

The Individualism-Collectivism dimension describes whether people in a country view themselves primarily as individuals or as members of a

group. In individualistic cultures, the focus is on individual (and immediate

family) well-being and high value is placed on autonomy, individual

achievement, and privacy. In collectivist societies, people view themselves as being part of a larger group that protects and takes care of them in

exchange for loyalty and devotion. Hofstede found the U.S. to be a highly individualistic country whereas Japan is an example of a collectivist society.

The third dimension of Hofstede is a continuum with Masculinity at

one end and Femininity at the other. Masculine cultures were strongly achievement-oriented, tended to view the ambitious pursuit of high

performance as the ideal, and emphasized the acquisition of money and

power. Feminine cultures, in contrast, emphasize quality of worklife issues,

greater equality between men and women, and taking care of the disadvan

taged in society. Japan scored high on Masculinity whereas the Scandina

vian countries of Sweden and Denmark were the most Feminine societies.

The fourth dimension, Uncertainty Avoidance, refers to how people react to uncertain or ambiguous situations. In countries that have high

Uncertainty Avoidance, people tend to be risk averse and go to great lengths to create stable and predictable work environments. In these societies, there

are often many rules and procedures to keep uncertainty in check. In

countries that have low Uncertainty Avoidance, people tend to be more

accepting of change, are risk takers, and less concerned with adherence to

rules, procedures, and hierarchies. Hofstede found countries such as the

U.S. and Canada to have low Uncertainty Avoidance and countries such as

Japan and Greece to have high Uncertainty Avoidance.

However, there are some important limitations to Hofstede's study. For one, some key countries were not included in his analysis?China and

Russia, for example. For another, he ignores differences in culture that

exists within particular countries. Despite these, Hofstede's study has been

replicated with much support and his classification has been used to study




a wide variety of comparative issues. His work continues to have a tre mendous impact on the field of international management.

Hypothesis 1: Countries characterized by a high degree of Power Distance

among its population is likely to be have higher levels of corruption. As discussed above, Power Distance refers to the extent to which the less

powerful members of a society accept and expect that power be distributed

unequally. In societies where the Power Distance is greater, people lower in the hierarchy accept that people higher up have the right and ability to

make decisions for the entire society or firm. Under this paternalistic system, subordinates receive favors from their superiors by providing loyalty. Favoritism and cronyism are more likely to occur and more likely to be accepted in countries where the Power Distance is high. In contrast, countries with lower Power Distance have checks on the exercise of power; there is greater upward mobility among the population; and people are less

accepting of hierarchical barriers to advancement. Thus, it is hypothesized that the greater the Power Distance in a country, the higher will be the level of corruption.

Hypothesis 2: Countries whose citizens are highly individualistic are likely to have lower levels of corruption than countries whose people are more

group-oriented. Highly individualistic countries are characterized by loose ties among its citizens. The interest of self and immediate family take

precedence over larger groups. The individualistic philosophy focuses on

universalistic concerns with society and not with the needs of a particular group. In individualistic societies, the level of economic and political

competition is greater than collectivist societies resulting in less opportuni ties and tolerance for corruption. Thus, it can be hypothesized that the

greater the degree of Individualism in a country, the lower will be the level of corruption.

Hypothesis 3: Countries with a high masculinity culture are likely to have

higher levels of corruption than countries are highly feminine in orientation. In countries that are highly masculine, sex roles are clearly differentiated, and the values associated with achievement (e.g., recognition, power, and

wealth) are idealized. These countries are characterized by a highly competitive and aggressive ethos?often at the expense of ethical consideration?where the dominant dimensions of success are wealth and material possessions. In contrast, in low masculine countries (or femininity),




sex roles tend to be blurred where the dominant values are quality of life

issues, sympathy for the weak, and enhanced position of women. Pursuit of material wealth and power are less important and thus feminine societies

may not be inclined to bribe taking to the same extent as masculine societies. Given this distinction, the attraction of bribes and its attendant conditions are more likely to prevail in masculine countries. Thus, it is hypothesized that a country that is highly masculine is more likely to evidence a higher level of corruption.

Hypothesis 4: In countries where people are risk takers the level of corruption will be lower than in countries where people are risk averse.

Societies that are highly risk averse are likely to seek safety, security, and

certainty. Competition and free market forces are much more constrained as they contribute to uncertainty. The people place a high premium on job security and employee benefits. Corrupt practices may serve as a way to ensure more certain outcomes. In contrast, in countries with low risk

avoidance, competition in the economy is less likely to be restrained. Thus, it can be hypothesized that a country that is risk averse is more likely to

evidence a higher level of corruption.

Hypothesis 5: Countries with higher levels of per capita income (as measured in terms of purchasing power parity) are likely to have lower

levels of corruption. Low-income levels contribute to corrupt practices because officials and politicians may be tempted to misuse their position and connections to supplement their earnings. In contrast, if income levels are

high, the propensity to seek bribes and kickbacks to supplement one's

earnings, is likely to be lower. Hence, corruption is likely to be more

prevalent in poor countries as compared to richer countries (Todaro, 1994). Thus, we hypothesize that the higher the per capita income in a country, the less will be the level of corruption in that country.

Hypothesis 6: Countries that have a higher proportion of their gross domestic product (GDP) accounted for by foreign trade are likely to have

lower levels of corruption. Corrupt countries are less open to trade than

competitive ones. The illegality of bribery would mean that participants would keep the transactions secret (Rose-Ackerman, 1978). Information about bribe prices may not be well publicized. Potential traders and investors may refuse to enter the market because of moral scruples and fear of punishment, and public officials in the host country may limit their




dealings to insiders and trusted friends. Furthermore, a corrupt society may also lack a reliable legal framework which will discourage foreign businesspersons from entering into contracts. Thus, it can be hypothesized that countries which have a higher proportion of their gross domestic

product accounted for by foreign trade are likely to have lower levels of

corruption.

Hypothesis 7: There is a relationship between the extent of disparity in income among the population in a country and the level of corruption in that country. Countries are characterized by great disparities of income on one hand and considerable egalitarianism among others. Economic literature

suggests that high-income equalities give rise to corrupt practices (Gillis, et

al, 1992). However, one cannot make any a priori assertion about the direction and nature of this variable. It is possible that with compensation levels for the upper level decision and policy makers being much higher than those who are at the bottom, they are less likely to be corruptible. If officials are paid much less than people with similar training elsewhere in the

economy, only those willing to accept bribes will be attracted to the civil service. The Southern African country of Botswana is seen as a relatively less corrupt country. One reason for this is the country's commitment to a

professional and well-paid civil service (Raphaeli, et al, 1984).

Statistical Data and Methodology

To conduct this study, we used the 1998 Corruption Perceptions Index (CPI) score computed by Transparency International as the measure of national

corruption. The CPI has gained acceptance amongst economists, academ

icians, businesspersons, and the media as a credible measure of corruption (Fitzpatrick, 1999). It should be noted that CPI scores report perceptions of

corruption within countries based on surveys conducted by a variety of

organizations. The Index does not measure actual levels of corruption. The

perception is about the extent of corruption among public officials and

politicians in individual countries with respect to conducting business. The CPI does not reflect corruption in the private sector or other forms of

corruption (e.g., electoral fraud).

Transparency International, based in Berlin, Germany, uses the

findings of several surveys on corruption to develop its composite index. The 1998 CPI was based on data from the Economist Intelligence Unit




(Country Risk Service and Country Forecasts), Gallup International, the Institute for Management Development (World Competitiveness Yearbook), the Political and Economic Risk Consultancy in Hong Kong (Asian Intelligence issue), Political Risk Services (International Country Risk

Guide), the World Bank (World Development Report and Private Sector

Survey), and the World Economic Forum (Global Competitiveness Survey) collected over the previous three years (www.transparency.de). All these studies have a section on the problem, prevalence, pervasiveness, extent, and the number of cases of corruption in various countries. By being a single composite score, the CPI has increased the reliability of the data of each individual source. While we could have used the scores or rankings pro vided by several of the surveys used to calculate the CPI, we believe the CPI score is more valid and reliable and best captures the perception of the level of corruption in a country as it affects the international businessperson.

The CPI is computed on a scale of 10.0 to 0.0. A country rated 10.0 means the country is perceived to be virtually corruption free; a score of 0.0 means the country is perceived as totally corrupt. The 1998 CPI assessed

corruption level in 85 countries as perceived by business people, risk

analysts, investigative journalists and the general public. The CPI scores are based on survey data of experiences over the past three years. Table 1

reports the CPI scores for the 47 countries that are included in this study. The CPI is the best available numerical information we have about

corruption in a country that can be compared across other countries. There are certain limitations to the construction of the Index, what it measures, how it measures, and what it signifies. For instance, it does not measure the

corrupt practices of businesspersons in their home country. More crucially, it is a measure of the perception of corruption in a country, not actual levels of corruption. The Index does not distinguish petty from grand corruption or political from business-related corruption. However, the CPI has rapidly emerged as a suitable data set for academic research and is widely reported in the media when it is announced annually (Husted, 1999).

The data for the four cultural variables were those developed by Hofstede. Of the countries studied by Hofstede, 47 matched those for which CPI scores were available and are included in the analysis reported here. The national scores for Power Distance ranged from a low of 11 to a high of 104 while that for Individualism ranged from 6 to 91. The Masculinity score

ranged from 5 to 95 and for Uncertainty Avoidance it was 8 to 112.




Hofstede's cultural dimensions were chosen as measures of national cultural characteristics for several reasons. For one, they are based on a very

large database, which controlled for variance by focusing on a single international firm that was renowned for its strong corporate culture. For

another, Hofstede's study has been replicated and used for studies in a large variety of fields and forms the basis for many culture-related business research. Finally, the four dimensions tap into deeper cultural values and

make significant comparisons between national cultures in such detail. Data for the economic variables were obtained from highly regarded international data collection organizations.

We used Per Capita Income in terms of purchasing power parity (PPP) in U.S. dollars in a country. This data was obtained from the 1998-99 World

Resources?A Guide to the Global Environment (1998). The original data was reported by the United Nations Development Programme. The PPP version of the Per Capita Income is a truer reflection of income levels in a

country because it is linked to the price of goods and services. The Foreign Trade information was calculated as the sum of the ex

ports and imports of a country as a percentage of its gross domestic product. This data was obtained from the Human Development Report of the World Bank (1997).

Data on income distribution among the population of a country,

reported by the World Bank, was used to calculate a score for the Income Distribution variable (Human Development Report, 1997). We divided the

proportion of income earned by the top 20 percent of the population in a

country by the income earned by the bottom 20 percent. The higher the

number, the higher is the disparity in income between the top and bottom

groups. The smaller the number, the difference between the very rich and

very poor is much less.

Multiple regression analysis and t-tests were used to analyze the data to identify variables that could explain the level of corruption in the countries studied here. Since the CPI is an inverse scale where a high score

signifies low corruption and a low score means high corruption, the reader must be careful when interpreting the direction of the signs of the regression coefficients. As per the hypotheses discussed in the previous section, for Power Distance, since a low CPI score is associated with greater corruption, the expected sign of this variable is negative. For Individualism, however, since a high CPI score is associated with lower corruption, the expected sign




Table 1: Countries and their 1998 Corruption Perception Index

Country CPI Score Country CPI Score

Denmark 10.0 Malaysia 5.3

Finland 9.6 Taiwan 5.3

Sweden 9.5 South Africa 5.2

New Zealand 9.4 Greece 4.9

Canada 9.2 Italy 4.6

Singapore 9.1 Peru 4.5

Netherlands 9.0 Uruguay 4.3

Norway 9.0 Korea (South) 4.2

Switzerland 8.9 Brazil 4.0

Australia 8.7 Jamaica 3.8

United Kingdom El Salvador 3.6

Ireland 8.2 Turkey 3.4

Germany 7.9 Mexico 3.3

Hong Kong Philippines 3.3

Austria 7.5 Guatemala 3.1

United States 7.5 Argentina 3.0

Israel 7.1 Thailand 3.0

Chile 6.8 India 2.9

France 6.7 Pakistan 2.7

Portugal 6.5 Ecuador 2.3

Spain 6.1 Venezuela 2.3

Japan 5.8 Colombia 2.2

Costa Rica

Belgium

5.6

5.4

Indonesia 2.0

Note: Score ranges from 10 to 1 where 10.00 represents totally free of

corruption and 0.00 highly corrupt. (Tranparency International: The Corrup tion Perceptions Index, www.transparency.org)



Corruption A cross Countries 3 7

of this variable is positive. For Masculinity, since a low CPI score is associated with greater corruption, the expected sign of this variable is

negative. For Uncertainty Avoidance, since a low CPI score is associated with greater corruption, the expected sign of this variable is negative. Since a high Per Capita Income (PPP)is hypothesized to have a high CPI score

(which is associated with low corruption), the expected sign of this variable is positive. Similarly, since a large Foreign Trade is hypothesized to be related to low corruption, (which is a high CPI score), the expected sign of this variable is positive.

Statistical Results

A multiple linear regression analysis was run using the CPI as the dependent variable and the four cultural and three economic factors as the independent variables. The distribution of the CPI is positively skewed?the median (5.4) is smaller than the mean (5.81)?which implies non-normality. However, this is not a problem since our sample size is over 30 countries. A problem often encountered in using multiple regression is that two or more of the

independent variables may be correlated and thus produce redundant information. We tested for multicollinearity by computing the VIF

(Variance Inflationary Factor) statistic. The results indicate that there is no

significant collinear relationship among these independent variables. A scatter plot for the variable Income Distribution showed that it was not

linearly related with the dependent variable. To capture the possible non

linear relation, a squared transformation of this variable was used in the

regression model. The multiple regression results are presented in Table 2. The overall

model is highly significant with adjusted R square value of 0.837 which

suggests that this set of independent variables can explain 84 percent of the

variability of the CPI across countries. Four of the independent variables were significant at the .05 level. For the cultural factors, the significant variables were Power Distance and Masculinity. The coefficient signs for

both variables are consistent with the hypothesis. It appears that the higher the degree of Power Distance and Masculinity respectively in a country, the

higher is the perceived level of corruption there. The other two cultural

variables, Individualism and Uncertainty Avoidance, were not found to be

statistically significant at the .05 level. The sign of the coefficient was consistent with the hypothesis and both were relevant important variables

(because the respective F values were greater than 2.0).




Table 2: Multiple regression results

Variable Coefficient T-statistic Significance level

Cultural

Factors:

Power Distance -0.031 -4.097

Individualism 0.016 1.556

Masculinity -0.030 -4.852

Uncertainty

Avoidance

-0.014 -1.653

0.00*

0.12

0.00*

0.09"

Economic

Factors:

Per Capita Income

(PPP) 0.000 5.664

Foreign Trade 0.006 1.545

Income Distribution 0.001 2.346

0.00*

0.12

0.02*

Note: Simple regression on each of the seven variables was run and all of them were individually significant, suggesting that each of them were

relevant for explaining the level of corruption in a country.

Adjusted R square = 0.837

* significant at the .05 level

^^significant at the .10 level

Two of the economic variables were found to be significant. The Per

Capita Income in terms of purchasing power parity was highly significant. Countries with higher levels of per capita income were perceived to be less

corrupt. This finding is consistent with the hypothesis. The Income Distribution variable was also found to be significant though the direction of the relationship was positive. This suggests that the higher the disparity of income distribution, the higher the CPI score which means less corrup tion. The hypothesis was that no a priori assertion could be made about the

impact of income distribution in a country and the perceived level of




corruption there. The results are intuitively challenging in that higher income disparities would be generally associated with higher levels of

corruption. It appears, however, that in a particular country, government officials and politicians may have compensation levels which are much

higher than those for the bottom fifth of the population. This high level of

compensation at the upper levels of the civil service and ruling politicians would, in fact, diminish the possibility of corrupt behavior. Managers of

foreign firms would normally interact with senior civil servants and

politicians. To the extent they are well compensated, they are less likely to

engage in corrupt relationships with the foreign businesspersons and

managers. Certainly, the example of Singapore bolsters this argument. That

country is perceived to have a fairly low level of corruption (CPI=9.1), has an Income Distribution factor of 9.59, and a per capita income of nearly $21,000. However, Singapore's civil servants and politicians are paid exceedingly high salaries, partly to discourage corrupt conduct.

Since elements of both cultural and economic factors were significant, we sought to ascertain whether cultural factors were more important than economic factors or vice versa. To do that, a new variable (Cultural Factor) was created to capture the contributions of all the four cultural factors and another variable (Economic Factor) was created to capture the contributions of all the economic variables. We ran two separate regression models using the cultural factors only and the economic factors only. Each of these individual models were significant; each explaining over 60 percent of the

variability of the CPI. This suggests that both factors are important to

explain the CPI. We conducted a test to determine the relative dominance of the economic and cultural variables. The test results are inconclusive

indicating that both sets of factors are equally important in explaining the

variability in the CPI.

Interaction Effect

To see if the independent variables interacted with each other, we looked at the cross correlation (Pearson product moment correlation) data. The results showed that there was a strong correlation between (a) Power Distance and Individualism (negative relationship) (b) Power Distance and Per Capita Income (PPP) (negative relationship) (c) Individualism and Per Capita Income (PPP), and (d) Income Distribution and Per Capita Income (PPP) (negative relationship). A regression was run using the interaction variables




as independent variables and they were found to be significant. This means

that some cultural factors influence some economic factors and vice versa

and their joint effect on the CPI was also significant.

Discussion of the Findings

The findings reported in this paper point to the significant role of both

cultural and economic variables in the incidence of corruption in a country. Power Distance and Masculinity were highly significant and supports the

hypotheses for these two variables. In high Power Distance countries,

corruption may be more acceptable and less likely to be challenged. In high Masculine countries, an aggressive pursuit of success and achievement

appears to accompany corrupt conduct. While Individualism and Uncer

tainty Avoidance were important factors, they were statistically less

significant. However, the signs for all the variables were consistent with the

hypothesized directions. As a whole, the cultural factors were significant. Power Distance also interacted strongly with Individualism and Per Capita Income (PPP) and so did Individualism.

Two of the three economic variables were highly significant. Countries with higher per capita income (PPP) are likely to have less

corruption. The variable, Income Distribution, was the other significant economic variable. This finding suggests that larger inequality in the

distribution of income in a country, the lower is the level of corruption. In

this study, we looked at the ratio of the top 20 percent of the income level

with the bottom 20 percent. A different result may obtain if we used a ratio

of 10 percent. However, the results reported here are quite robust. The

interaction effect between this variable and Per Capita Income (PPP) was

also significant. This means that higher the average income levels, the

spread between the top and bottom quintiles is smaller. The overall results

provide us a profile of a typically corrupt country as one which is high in

Power Distance, Masculinity, and Uncertainty Avoidance, low Per Capita Income (PPP), and high Income Inequality.

The findings reported here lend strong support to the thesis that

cultural factors can explain some of the differences in corruption levels

across countries. Since cultural values and practices are deeply embedded

in a society, they are difficult to change, and in fact, more likely to persist. To that extent, efforts to curb corruption will be frustrating and long-term. Economic factors too provide a strong explanation. Economic growth in the




form of rising incomes offers the hope of reduction in corruption, since

studies show that corruption may hobble economic growth. Income

inequalities may be less of a concern especially if average income levels in

the country are high. One explanation may be that where the income levels

of the upper strata of the society are very high, to some extent this segment of the population may be insulated from petty corrupt practices. This is not

to suggest that vast disparities in income distribution is desirable; it only says that the role of income disparity on corruption levels in a country is

more complicated than might otherwise appear. One implication is that even if income levels in poor countries should

rise, corruption levels may continue to be high in countries with high Power

Distance and Masculinity scores. The interaction results reported in the

previous section indicate that this is so; that is, cultural and economic factors

together affect corruption levels. However, all cultures experience continual

change. Small, technologically simple, preliterate societies tend to be more

conservative and thus, change less rapidly than modern, industrialized,

highly complex societies. Whether one society will accept the cultural

practices of another society will depend on whether the new innovations are

seen to be superior to what already exists; they are consistent with existing cultural patterns; they are easily understood; they are able to be tested on an

experimental basis; and last, but not least, the benefits are clearly visible to a relatively large number of people (Rogers, 1971). Thus, changing cultural

traits that allow corruption to be practiced to one where it is shunned is

conceptually possible, though likely to be slow.

Despite the formidable challenge of raising incomes and changing entrenched cultural values, an integrative approach to address the problem of corruption may yield positive results. It would appear that Power

Distance could be reduced in the long run through a combination of enhanced levels of education for all sections of the population and introduc tion of advanced technological systems in the workplace that would reduce

hierarchy and privilege and increase transparency in operations. Similarly,

Masculinity can be reduced through increased and non-discriminatory

participation of women in the workplace. Provision of social welfare

benefits to the largest possible segment of the population to encourage risk

taking may reduce Uncertainty Avoidance. Faster economic growth may be

facilitated by business friendly policies in an environment where the

government's role is more constricted rather than expansive. While pushing




for cultural and economic change, policy makers and advocacy groups need to ensure that sanctions against corruption and the legal framework that has to go with it are in place. Public policies and anti-corruption strategies would have to be formulated bearing in mind the cultural peculiarities of

every country. The strong support for the relevance of cultural and economic factors

as determinants of corruption implies that looking at the issue only from a

legalistic perspective is inadequate. Framing anti-corruption laws and

meting out strict punishment to violators ignores, in very real terms, the cultural and economic forces that sustain corruption. To have much

prospect of success, anti-corruption efforts will have to complement legal measures with an appropriate mix of economic development and cultural

adjustment.

Implications for International Business Managers and Policy Makers

The findings reported in this paper enhance our understanding of the

relationship of culture and economics to the prevalence of corrupt practices in a country. These findings are relevant for international business managers, international organizations which are working to reduce and remove cor

ruption, and foreign governments. Some of the major implications of the

findings are:

The cultural profile of a country is related to the level of corruption in that country. Thus, advance research on the cultural characteris tics of a country can prepare foreign businesspersons who are

planning to trade with or invest in that country. Businesspersons are likely to encounter less corruption in countries where government involvement in economic affairs is limited and where the private sector plays a large role. Because cultural values are deep and enduring, the efforts of advo

cacy groups to curb corrupt practices will be very difficult and

long-drawn. International businesspersons can expect relatively less corruption in countries with high levels of per capita income (PPP). The prevalence of a relatively high disparity of income among the population in a country does not necessarily mean that corrup tion in that country will be higher. Indeed, it may be lower if




government decision-makers are well paid and average income

levels are high. Because poorer countries and those with certain cultural character

istics (notably, high power distance, high masculinity, and high

uncertainty avoidance) are more likely to exhibit corrupt tenden

cies, international firms may find it easier to rely on host country nationals to negotiate business deals and to run business operations in those countries.

Since both economic factors and cultural factors are relevant,

emphasizing economic development will not address the entire

nature of the problem of corruption. Similarly, taking a legalistic view of corruption with emphasis on prosecution for violation of

laws and strict penalties, ignores economic and cultural variables.

Anti-corruption measures may be more effective if they are cus

tomized to fit the cultural peculiarities of a society.

Conclusions

The study suffers from several inadequacies which future research may be

able to address. We were unable to include some major countries (e.g., China and Russia) in this study because we did not have comparable cultural

indices for these countries. For the same reason, African countries were

excluded. Availability of suitable data from these countries would make

such studies more comprehensive. While we acknowledge that legal frameworks and lawful penalties may affect the level and nature of

corruption, the present study did not include a measure of this legal dimension and was not part of the analysis. Future studies may be able to

integrate the role of laws and punishments in the analysis of corruption. The study was based on cross-sectional data, albeit obtained over a

three-year period. To ascertain whether perception of corruption in a

country has changed over time and the durability of the independent variables, a pooled cross-section time series analysis is necessary to make

the conclusion more robust. This would mean obtaining comparable data for

measuring corruption over a period of time. With Transparency Interna

tional now publicizing data on an annual basis, a longitudinal study of

corruption should be feasible. Also, given some of the deficiencies of the

CPI, should other more valid measures of corruption become available,

especially one that measures actual levels of corruption as opposed to mere




perceptions, they obviously should be used in analysis of the kind presented here. Future studies need to examine the symbiotic nature of corruption between firms offering bribes and government officials demanding bribes. This study has examined the significance of the latter part of the equation. Other studies need to look at the propensity to offer bribes on the part of international businesspersons. We should stress that we do not suggest that economics and culture are the causes of corruption; instead we show that economics and culture are closely associated with corruption.

This paper examined an issue of considerable current concern

?corruption in the world as it impacts international business. The findings suggest that reducing corruption will be a slow process. However, knowing

what contributes to corruption provides insights into what sorts of programs and actions may be more effective.

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Corruption Across Countries: The Cultural and Economic Factors