Beyond the culture of corruption: Staying ethical while doing business in Latin America.

Author:Stanfill, Bruce A.
Position:Report
 
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INTRODUCTION

Background

High levels of corruption and poor economic performance are inextricably tied together, and are a self-perpetuating situation in many Latin American countries. Corruption is commonly defined as the use of a position of power for illegal personal gain (Argandona, 2005; Cleary, 2007; Charoensukmongkol & Sexton, 2011), and the payment of unofficial fees to authorities for personal benefit (Hofstede, Hofstede, & Minkov, 2010). Adverse impacts from corruption range from the relatively small but ubiquitous mordida [the nibble] that many drivers pay a traffic officer to not fine them what the infraction truly merits (Cleary, 2007; Fried, Lagunes, & Venkataramani, 2010) to vast sums of money paid for preferential treatment during the bidding of government contracts (Mahagaonkar, 2008; Kenny, 2009).

In the private sector, corruption flaunts intellectual property rights, hindering the trust needed for successful collaboration and innovation. Improper payments for business deals undermines fair competition (Maloney, 2002; Argandona, 2008; Transparency International GCR, n.d.), further suppressing economic productivity (Crespi & Peirano, 2007; Veracierto, 2008). When corruption is present within the court system, it prevents the fair and impartial justice for citizens in many nations of the world, and precludes recourse to a higher authority for businesses, both domestic and foreign, who attempt to take an ethical stand against improper solicitations in the normal conduct of their trade. With the erosion of trust in the courts, greedy individuals are empowered to take advantage of the disenfranchised without concern for any adverse consequences (Fried et al., 2010); without a fair system of justice, all other sectors of society are laid bare to corruption. A country's courts send a blaring message to their citizens: "In this country corruption is tolerated," (Transparency International-GCR, n.d.).

Problem

The prevalence of corruption in Africa, Asia, and Latin America contrasted with the lack of widespread corruption in Northern Europe and the Anglo world (Transparency International, n.d.) begs the question: Is corruption cultural? But this is a loaded question corruption has been shown to be correlated with culture (Hofstede et al., 2010), but does the culture cause the corruption or does corruption influence the culture to become self-perpetuating? This study draws heavily on the work of Stan-fill, Medina, Esquivel, de la Rosa, and Villarreal (2015), and goes beyond it to identify the values and beliefs within the bounds of Latin American culture which, if influenced by international businesses through their commercial and societal efforts, can lead to a lower prevalence of incidents of corruption (Veracierto, 2008) or lessen the adverse impacts from corruption on their business development efforts (Anokhin & Schulze, 2009).

REVIEW OF LITERATURE

Corruption, Trust and Innovation

Maloney (2002) asserts that the causes of Latin America's economic underperformance are related to its deficiency in innovation and technological adaptation. First, there has been and continues to be a lack of "learning capacity," which is its human capital as well as the linkages between institutions facilitating the adoption and development of new technologies. Also, the failure is perpetuated by the reluctance to embrace technology, generally associated with artificially constructed monopoly power. Analysis shows that not only had Latin America lagged the rest of the world in economic growth over many decades, but that it appears to be related to a lack of openness to trade, domestic investment, and a "knowledge index" which represents many innovation-related factors. Maloney decries the continuing eschewing of competition with monopolistic industries: "[I]t is worrying that many Latin American leaders, in the face of vast international evidence, are even today reverting to policies that will guarantee that the region remains far from the knowledge frontier," (Maloney, 2002, 149).

Anokhin and Schulze (2009) investigated the relationship among entrepreneurship, foreign direct investment, innovation, and corruption in 64 countries and found that the better the Worldwide Governance Indicator-Control of Corruption (WGI-CC), which is very strongly correlated with Transparency International's Corruption Perception Index (CPI, Carballo, 2009), the greater the level of innovation in a country. As foreign direct investment (FDI) increases, control of corruption has a greater positive effect on patent applications, but a lesser positive effect on realized innovation. The authors emphasize that efforts to control corruption can increase the levels of trust with the ability of the state institutions to reliably and equitably enforce the rules of trade and the law. Tangible results will not be immediately apparent, however over time, the reduction in corruption can increase investment and productivity in entrepreneurship and innovation.

Veracierto (2008) used game theory to demonstrate how the normal equilibrium levels of innovation in industry are disturbed in the presence of bribe payments for market entry. The author notes an unusual result of the analysis where, near critical point (probability of corruption going undetected divided by the probability of detection), small increases in the corruption-related penalties and fines (as a percentage of the value gained in the deal) can influence business and government officials to act more justly, resulting in large increases in the amount of product innovation, while changes in penalties far from that critical value have no effects. (Veracierto, 2008, p. 34).

Corruption and Economy (GDP)

It is well known and documented that nations with greater wealth (i.e. GNI per capita) are less corrupt by nearly every measure (Moore, 2008, Carballo, 2009; Hofstede, Hofstede, & Minkov, 2010, 222; Hiskey, Montalvo, & Orces, 2014; Batabyal & Chowdhury, 2015). Going into more detail, Charoensukmongkol and Sexton (2011), controlling for major macroeconomic factors and economic integration, found that local corruption tends to hurt international trade in Latin America and the Caribbean, particularly with respect to exports, which largely consist of commodities. Mo (2001) examined the means by which corruption (as measured by the 1996 CPI) affected the economic growth rate of 46 countries for the period of 1970-1985. While the direct effect of CPI explained 11% of the impact on economic growth, other mechanisms related to corruption had greater effects: the average education of those over 25 years old explained 15%, private investment explained 21%, and political instability (assassination rate and number of changes in the government) explained 53%.

Corruption in business

Argandona (2008) discusses the ethical considerations of making facilitating payments, paid to expedite a contract or approval. The main issues with such petty corruption is that it leads down a slippery slope; although facilitating payments may be pervasive in a country, may be a low-cost alternative to more significant costs related to delays, and may not result in any loss of reputation (particularly in countries where grand corruption is rampant), these payments help create a culture of corruption in the company and the national society, they may lead to escalated frequency or amounts of future payments, and they impair citizens' trust in official organizations. While business may be permissive with respect to small bribes to obtain something to which they are already entitled, "... they should adopt the opposite attitude, at least as a general rule, given the internal and external consequences of facilitating payments for the company, its stakeholders and society at large" (Argandona, 2005, p. 261).

Arizabalo (2007) evaluated economic and corruption data to determine the effects which the perception of corruption had on more than 2,000 businesses in 20 Latin American countries. The author found that, after controlling for general economic factors, higher corruption (lower CPI) was a significant factor in reducing annual sales, while a high disparity in the distribution of wealth increased sales; either factor separately combined with other overall economic factors explained 40% of the variance in sales. However, when both are included together, corruption and income disparities exacerbate their negative effects, explaining an additional 7% of variance. The author concludes that the combination of corruption and income disparity in Latin America seriously discourages foreign investment in the region.

Kenny (2009) elaborates on the world-wide impact of corruption, summarizing data from the Business Environment and Enterprise Performance Survey (BEEPS). This survey was initially conducted in 1999-2000 and canvassed more than 4,000 organizations within 22 transitioning Eastern European countries. He provides some specific examples:

Within infrastructure projects and operation: an estimated 5-20% of construction costs are spent in the payment of bribes.

The median firm reported paying 1-2% of revenues to illicit fees to public officials.

The top five components of the illicit payment budget of the average organization are: dealing with licenses, health and fire inspections (28%), related to taxes (18%), securing government contracts (15%); dealing with customs (12%), and facilitating connections to utilities (11%) (p. 319).

The author notes that the source of the funds is important to the magnitude of the adverse impact: building a road with cheap materials and pocketing the savings is worse than just inflating the price; however, if funds are diverted from a maintenance budget to pay an inflated price, then the adverse economic impact from poorly maintained roads elsewhere may completely offset any benefits from the new road.

While Kenny (2008) noted that bribe payments are higher in construction than in most...

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