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Doing Business in Corrupt Places

It’s fraught with risk, but could lead to competitive advantage.

(originally published by Booz & Company)

Title: Victim or Victimizer: Firm Responses to Government Corruption

Authors: Roberto Martin N. Galang (John Gokongwei School of Management, Ateneo de Manila University)

Publisher: Journal of Management Studies

Date Published: March 2011

Doing business in countries that are rife with corruption can be arduous, frustrating, even dangerous. But companies that survive the experience, and learn from it, can develop an unusual competitive advantage that will serve them well when entering similar challenging markets around the world, according to this paper. In fact, the author says, companies have an interest in protecting this advantage and sometimes even in preserving the status quo of the markets in which they are operating.

To identify trends in the area of business and government corruption, the author reviewed more than 600 research articles in the top 20 academic management journals, as ranked by the number and impact of their citations. Eventually, the list was whittled down to 314 articles that focused on company interactions with governments in countries that have significant levels of corruption. The articles were published from 1996 to 2008 in nine of the journals, including the Journal of International Business Studies, the Journal of Management, and the Strategic Management Journal. About two-thirds of the articles were quantitative, 14 percent were case studies, and the rest were theoretical or analytical in nature.

The markets that were discussed included Russia (ranked 154 out of 178 countries in the latest index of perceptions of corruption compiled by Transparency International, an organization based in Germany), India (ranked 87), and China (ranked 78), as well as scores of smaller emerging nations. The research revealed that businesses can prosper in environments with entrenched corruption, and some have the operational capabilities to make political deficiencies work in their favor — and not necessarily by resorting to illicit means.

What is essential is to adopt a growth strategy and forge a relationship with the local government in a way that is aligned with the political situation in each market. Gaining experience in one of these markets encourages a company to enter other difficult markets, where competitors without similar experience are reluctant to follow, the study says.

There are four main approaches for those operating in a corrupt market, according to the study. They are pegged to increasing levels of corruption:

1. When firms can gain political influence in a country, they can attempt to use that influence to alter the regulatory structure. This can mean lobbying governments to reduce overall corruption or networking with other firms to argue for preferential regulatory rules.

2. In countries with limited regulation, firms can largely avoid the local political structure. Instead, they can create self-regulating industry associations, which effectively shift the decision-making power from the government to the industry and its stakeholders.

3. Companies with fewer political options in countries with strong centralized governments that enact overbearing regulatory laws, such as China and Russia, usually ally themselves with the government, networking with powerful officials and launching joint ventures with local firms. Companies using this strategy should also promote corporate social responsibility as a way to garner positive publicity and get influential stakeholders on their side, with the ultimate goal of influencing political decision makers and lessening the risk of regulatory interference.

4. Finally, the choice to accede is the strategy used by companies that don’t possess many political resources in countries where regulation has little impact on their industry — for example, in recently war-torn nations and emerging economies such as Egypt or Ghana. In this setting, companies must proceed very carefully for fear of breaking anticorruption laws back home and risking damage to their reputation. To gain a foothold, companies might be tempted to use outright bribery. A safer choice would be to accept bureaucratic delays and slowly gain political influence.

The author stresses that corruption continues to have a major “corrosive” impact on the long-term health of the global economy, making it harder for many developing countries to attract foreign investment and adding uncertainty and risk to the effort of companies that do enter those markets. That said, corruption can be confronted, and its impact largely contained, if the correct local strategy is adopted.

Bottom Line:
Companies can cope with government corruption by understanding the political situation in each market and operating accordingly. Learning how to deal effectively with one market will make it easier to deal with others.

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