Columbia International Affairs Online: Working Papers

CIAO DATE: 01/2012

Rent(s) Asunder: Sectoral Rent Extraction Possibilities and Bribery by Multinational Corporations

Dimitar Gueorgiev, Edmund Malesky, Nathan Jensen

November 2011

East-West Center


Openness to foreign investment can have differential effects on corruption, even within the same country and under the exact same domestic institutions over time. This theoretical approach departs from standard political economy by attributing corruption motives to firms as well as officials. Rather than interpreting bribes solely as a coercive "tax" imposed on business activities, allowance was made for the possibility that firms may be complicit in using bribes to enter protected sectors. Thus, the expectation of variation in bribe propensity across sectors according to expected profitability and investment restrictions. Specifically, foreign investment will not be associated with corruption in sectors with fewer restrictions and more competition, but will increase dramatically as firms seek to enter restricted and uncompetitive sectors that offer higher rents. This effect was tested using a list experiment, a technique drawn from applied psychology, embedded in a nationally representative survey of 10,000 foreign and domestic businesses in Vietnam. The findings show that the impact of domestic reforms and economic openness on corruption is conditional on policies that restrict competition by limiting entry into the sector.