This brief is part of the Insights @ Center for Emerging Markets, a publication focused on cutting edge ideas and advice for global leaders about emerging markets.
By Kimberly A. Eddleston (Northeastern University), Elitsa R. Banalieva (Northeastern University) and Alain Verbeke, (University of Calgary; University of Reading; Vrije Universiteit Brussels)
Bribery and the “New Normal”
Prior research has considered whether entrepreneurs who bribe public officials in order to get ahead actually see any benefits from doing so. While it is possible that they could get some immediate benefits, like favorable treatment or access to limited government goods, it is also possible that over time, this could lead to a more corrupt business environment. The question is, do entrepreneurs from transition economies who frequently bribe see those bribes as helpful in removing business obstacles? Recent research tackles this issue by examining a sample of 310 privately owned small and medium-sized companies from 22 transition economies in Eastern Europe and Former Soviet Republics.
“New normal” is a term used to describe how events that were once abnormal have become commonplace. For example, the introduction of the European Monetary Union (EMU) led to changes in how governments managed budgetary and financial decision-making processes, and how EU-based multinational enterprises (MNEs) addressed institutional risk within the region. In order to assess the content and unfolding of a “new normal” situation, one must identify an impactful event which occurs at a higher level and affects strategic decision-making processes at the micro-level. For instance, post-Soviet economies that were transitioning from socialism to capitalism abandoned central planning and adopted policies supported by the Washington Consensus. This led to a period of chaotic capitalism, with informal networks, cronyism, and bribery becoming commonplace.
Despite efforts to combat corruption, it remains a widespread problem in the former Soviet republics, where institutional frailties take the form of institutional voids (i.e., shortages of effective macro-level institutional mechanisms that support business) and institutional over-kill (i.e., an overabundance of ineffective governance mechanisms that hinder business). In turn, corruption in the region is associated with a variety of downward cascading effects, such as reduced foreign direct investment, misdirected entrepreneurial talent, increases in venture start-up costs, and expansion of the informal economy. As open and fair mechanisms for distributing resources are hindered, everyone in the community suffers.
The burden of corruption weighs most heavily on entrepreneurs, who are the engine of growth and employment in most transition economies. A central assumption is that the only corruption and coercion associated with bribery are on the part of the public officials demanding bribes and bribe paying is portrayed as necessary for survival. However, entrepreneurs can also choose to bribe public officials in order to gain preferential treatment for their businesses. Such entrepreneurs are not only influenced by corruption, but also shaping it.
This research shows that family firms that frequently pay bribes are more likely to see their environment as corrupt and full of business obstacles, while those that rarely pay bribes are more positive about their business prospects. Those that frequently pay bribes are creating a reputation as payers, while those that rarely pay bribes are seen as protecting the family name. Meanwhile, non-family payers will rationalize their unethical behavior because they see their actions as promoting their personal interests and economic goals. They are also more likely to be morally disengaged, while recasting unethical behavior as acceptable and necessary.
Managerial and Policy Implications
- Taken together, these findings point to a bribery paradox, where entrepreneurs may pay bribes to reduce obstacles and gain an unfair competitive advantage in the short run, but at the same time, they enact a longer-term, “new normal” business environment that contains institutional impediments. Owners of family firms view their “new normal” through the lens of the family, leading to greater perceived business obstacles as the frequency of bribes increases. Conversely, the perceived level of business obstacles does not intensify as the frequency of bribes increases for owners of non-family firms. The findings indicate that frequent bribery does not necessarily make business obstacles easier to overcome, but instead creates a business environment where bribery becomes a costly part of business life. Therefore, family firms would be wise to minimize and eliminate their bribery activities and to foster a culture of ethical business practices. At the same time, policymakers should increase punishment and monitoring of bribery to avoid vicious cycles of escalating corruption.
Eddleston, K. A., Banalieva, E. R. & Verbeke, A. (2019). The bribery paradox in transition economies and the enactment of ‘new normal' business environments. Journal of Management Studies, 57(3): 597-625.
If you are interested in learning more about this work, contact Professor Eddleston.