Love conditionally: The ownership structure and bribery behavior of Chinese firms

• Author: Ruohan Wu,Huimin Shi,Zheng Jiang
• Date: 01 May 2019
• Published date: 01 May 2019
• DOI: http://doi.org/10.1111/rode.12584

Rev Dev Econ. 2019;23:1027–1049. wileyonlinelibrary.com/journal/rode

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INTRODUCTION

Corruption disturbs the production process and hinders a country's development. Entrepreneurs pay

bribes to “get things done” and “grease the wheel.” Krueger (1974) coined the term “rent- seeking”

to refer to the corruption of government officials. Corruption studies at the country level usually

rely on various perception indices to explain cross- country variation of corruption and its impact on

a country's economy. In terms of explaining cross- country variation, Cheung, Rau, and Stouraitis

(2012) found that national characteristics such as the quality of the police force, the extent of civil

liberties, and the existence of bureaucratic rigidities significantly affect bribing activities. Martin,

Cullen, Johnson, and Parboteeah (2007) confirmed the influence of cultural and institutional fac-

tors on corruption. Lee, Oh, and Eden (2010) argued that bribe size depends on to what degree a

DOI: 10.1111/rode.12584

REGULAR ARTICLE

Love conditionally: The ownership structure and

bribery behavior of Chinese firms

RuohanWu1

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ZhengJiang2

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HuiminShi3

1University of North Georgia, Dahlonega,

Georgia

2Central University of Finance and

Economics, Beijing, China

3Renmin University of China, Beijing, China

Correspondence

Huimin Shi, School of Economics, Renmin

University of China, 59 Zhongguancun St,

Beijing 100872, China.

Email: huiminshi@ruc.edu.cn

Funding information

Jiang and Shi acknowledge financial support

from National Natural Science Foundation

of China (Project No. 71503287). Shi

acknowledges financial support from the

Chinese Major Project of the National Social

Science Foundation (Grant No. 17ZDA097)

Abstract

This paper studies empirically the determinants of firm

bribery activities from the perspective of ownership struc-

ture. Using data on Chinese firms obtained from the

Enterprise Surveys conducted by the World Bank, we

compare the bribery activities of firms with various forms

of ownership. We find that compared with private and for-

eign firms, state- owned firms in China are not only more

likely to receive bribe requests from government officials,

but are also more likely to pay bribes. Meanwhile, firms

are more likely to bribe if they are extorted, or if they

expect to reduce infrastructural obstacles to their business

operations. Other factors such as manager experience and

external audits also exhibit significant influence upon

firms’ bribery decisions.

KEYWORDS

bribery payments, bribery requests, Chinese firms, government

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WU etal.

government can exercise residual rights of control. As for the consequences of corruption, Leite

and Weidmann (1999) and Mo (2001) found that corruption slows down the economic growth rate.

Lambsdorff (2003a,b) demonstrated the significant negative effect of corruption on a country's

capital inflow and capital productivity. Other studies have also revealed the adverse impact on a

country's investments (Campos, Lien, & Pradhan, 1999; Knack & Keefer, 1995; Méon & Sekkat,

2005; Wei, 2000).

More and more studies have focused on firm- level participation in corruption and its determinants.

The seminal work of Svensson (2003) was one of the first to study corporate corruption. Using the data

from Ugandan companies, he found that even when affected by the same policies or regulations, there

is significant variation in firms’ bribery- paying behaviors. The variation depends on firms’ ability to

pay and their power to refuse. It has further been found that firms with greater profits (Clarke & Xu,

2004), smaller size (Arvis & Berenbeim, 2003; Svensson, 2003), and faster expansion (Clarke & Xu,

2004; Svensson, 2003; Wu, 2009) are more likely to pay bribes. In addition, Collins, Uhlenbruck, and

Rodriguez (2009) showed that firms with executives who have social ties with government officials

are also more likely to bribe.

Although the problems of firm corruption have drawn much attention, to the best of our knowl-

edge, the relationship between firm ownership and bribery has not been investigated in depth. As

one of the few exceptions, Kasuga (2013) found that foreign ownership in Cambodia helped garment

manufacturers reduce bribe payments. Another relevant study, Duanmu (2011), found that multina-

tional enterprises (MNEs) based in countries less corrupt than China preferred to establish wholly

owned subsidiaries over joint ventures. Our paper aims to fill the gap by focusing on the relation-

ship between firm ownership and corruption. Specifically, we use the data on Chinese firms from

the Enterprise Surveys of the World Bank to explore the correlations between firm ownership and

corruption behaviors.

China provides an ideal environment for studying the impact of ownership on firms’ bribery ac-

tivities. For a long time, China had a planned economy, under which most businesses were controlled

by the government. Since the reform- and- opening- up program of the late 1970s, the Chinese govern-

ment has implemented several reforms of the state- owned economy. The dominance of state- owned

enterprises (SOEs hereafter) has shrunk significantly, while the number of private and foreign firms

has gradually risen. Nevertheless, SOEs still play a critical role in the Chinese economy overall.

According to an estimate by Szamosszegi and Kyle (2011), 40% of China's nonagricultural GDP was

still controlled by SOEs in 2011. Meanwhile, research has found that government ownership could

be related to corruption. For instance, Shleifer (1998) explained how government officials might

be interested in gaining more income through government ownership, including accepting bribes.

Thus, the prevalence of SOEs in China provides us with a valuable opportunity for understanding the

relationship between firm ownership and bribery behaviors.

Using firm- level data from the World Bank Enter prise Surveys, we find that compared with pri-

vate and foreign firms, the SOEs in China are not only more likely to receive bribe requests from

government officials, but are also more likely to actually pay bribes. Moreover, we show that more

time spent dealing with the government is another factor that leads to more bribery. Our findings are

both surprising and interesting, and help us to understand the complicated relationship between the

government and SOEs in China. Since the government is by definition the owner of SOEs, it is natural

that SOEs in China are considered to be privileged firms. According to Szamosszegi and Kyle (2011),

Chinese SOEs are believed to “enjoy preferred access to bank capital, below market interest rates on

loans from state- owned banks, favorable tax treatment, policies that create a favorable competitive

environment for SOEs relative to other firms, and large capital injections when needed.” We hope our

findings will prompt researchers to consider whether all of these privileges and gifts originate from