Honest stakeholders in corrupted environmentsFirm efficiency is, on average, lower in environments characterised by a high level of corruption, and this is even more so for honest firms. As shown in Figures 1 and 2, a 1% increase in the average level of corruption leads to a 2.04% decrease in average firm efficiency. However, greater variance in corruption perceptions is associated with greater efficiency. A 1% increase in corruption perception variation improves firm efficiency by 0.61%. The corruption heterogeneity in the environment shows that not all firms are willing to accept the business practices. i.e. corruption isn’t a necessary tax. By focusing on honest business practices, productivity can increase.
Figure 1 Effect of a 1% increase in average corruption on firm efficiency
Figure 2 Firm efficiency effect to 1% increase in variance of corruption perception
The effects are stronger for foreign-controlled firms, especially if their headquarters are located in low-corruption countries and/or run by female CEOs. For instance, while a 1% increase in the average level of corruption leads to a 3.16% decrease in efficiency of foreign firms, this effect jumps to 4.53% for foreign-controlled firms that come from low-corruption countries. These results are consistent with the idea that a foreign firms’ propensity to behave corruptly is affected by the cultural norms of their home countries, the legal restrictions they are subject to, and their relative lack of local market knowledge. If the corporation is run by a female CEO then efficiency goes down by 2.80 %, which is consistent with the literature on gender studies and law breaking. At the same time, only foreign firms can be more efficient if there is a greater variation in perceptions of corruption.
SummaryObtaining data on bribery is difficult due to its illicit nature. However, an ‘anonymous’ survey from the World Bank exists that specifically asks managers and owners in the CEE region about bribery practices. From that survey, we follow the existing literature and create more granular corruption measures to gauge the effects of different characteristics of bribery environments on the efficiency of honest firms.
The results are, on the one hand, expected, but they also reveal some new and quite interesting insights. While firms tend to be less efficient in high bribery environments, honest firms suffer even more. Our proxy for honest firms are those who are either controlled by foreign subjects, especially those who come from low corruption countries, and/or those who are run by female CEOs. If a corruption environment is characterised by a greater dispersion in corruption perception then honest firms are less penalised since there is room to conduct business honestly.
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