Need a 1 – 2 page summary for the following business case studies each in IRAC format. IRAC, i.e. Issue (basis of the case), Response (of the parties in the case/Relevance/Recommendations (of the student), Application (to the issue or problem raised and the different options out there) and Conclusion (Analysis of the company’s response and well as your recommendations Thus, to expand on the above , the IRAC categories are the main “headings” of your written case summary and under the “IRAC” categories are sub-headings that may take the following forms, e.g. Basis of the case/Pertinent issues (Issue), Analysis of the fact pattern in the case (Response), alternative options prescribed (Application), Predicted, Possible, and Desired Outcomes (Conclusion) etc. must be part of the case summary. Corruption in international
business (a) & (b) (1 – 2 Page)Diesel gate – heavy fumes exhausting the Volkswagen group (1 – 2 Page)Tesla: internationalization from Singapore to china (1 – 2 Page)Yahoo! In china (a) (1 – 2 Page)Gillette Singapore: managing global business integration on the ground up (1 – 2 Page)
corruption_in_international_business.pdf
dieselgate___heavy_fumes_exhausting_the_volkswagen_group.pdf
gillette_singapore_managing_global_business_integration_on_the_ground__a_.pdf
tesla_internationalization_from_singapore_to_china.pdf
yahoo__in_china__a_.pdf
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Harvard Business School
9-701-128
March 29, 2001
Corruption in International Business (A)
Most people know corruption when they see it. The problem is that different people see it differently.
1
Corruption has been of concern throughout recorded history. More than 2000 years ago, an Indian
prime minister wrote extensively about the topic and Chinese officials were given an extra allowance to
“nourish incorruptedness”. Several centuries later, Dante placed bribers in the deepest part of hell,
reflecting the medieval distaste for corrupt behavior. Corruption played a prominent role in many of
Shakespeare’s plays. And the U.S. Constitution named bribery as one of two explicitly mentioned crimes
for which a president would be impeached.2
Corruption is a complex issue that can be viewed from many different perspectives—economic, legal,
ethical, cultural, or practical. In some cases, the different perspectives are in congruence. For example,
bribery of high government officials is illegal and is considered shameful in nearly every society. In other
cases, however, the perspectives are very different. Many legal activities may be unethical, and some
ethical activities may be illegal.
Most discussions of corruption focus on the ethical aspects of the problem. Political scientist James Q.
Wilson once noted, “The problem with corruption is that it tends to become the Problem of Corruption.
Moral issues usually obscure practical issues, even where the moral issue is a relatively small one and the
practical matter is very great.”3 The ethical implications of corruption are important, but do not provide a
complete guide to the manager. This case* provides background on corruption in international business
and highlights economic, legal, and practical issues. It is organized into four sections. The first presents
background information on the extent of and causes of corruption. The second presents two views on
whether corruption is a problem. The third provides information on the United States’ Foreign Corrupt
Practices Act. The note concludes with a series of “caselets” designed to promote discussion of the legal,
ethical, and business issues managers may face.
What Do We Know?
For many years, corruption was widely lamented but little studied. This was, in part, because most
corruption occurs in secret. But it was also because development economists avoided corruption for
political reasons. Nobel prize-winning economist Gunnar Myrdal called this “diplomacy in research.”4
Since the mid-1970s, research on corruption has blossomed. This research helps us understand the extent
of and consequences of corruption.
*
A companion case, Corruption in International Business (B) HBS case 701-129, explores efforts by national
governments, international agencies, non-governmental organizations, and individual companies to combat
corruption.
This case derives from an earlier case, “Bribery and Corruption”, HBS No. 799-091, prepared by Research Associate Jay Sinha
under the supervision of Professors Rafael Di Tella and Robert E. Kennedy. This version was prepared by Professors Robert E.
Kennedy and Rafael Di Tella. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as
endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2001 by the President and Fellows of Harvard College. To order copies or request permission to
reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to
http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in
a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or
otherwise—without the permission of Harvard Business School.
1
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701-128
Corruption in International Business (A)
Causal factors
Susan Rose-Ackerman, a leading scholar of corruption, suggests that corruption arises
from the interdependence of the economic and political spheres. “Whenever a public official has
discretionary power over distribution to the private sector of a benefit or cost, incentives for bribery are
created. Thus corruption depends on the magnitude of the benefits and costs under the control of public
officials.”5 Elsewhere Rose-Ackerman writes, “Opportunities for corruption exist at every level of the
hierarchy, from the highest public office to the lowest rung of the ladder. They give rise to both ‘grand’
and ‘petty’ corruption. International corruption has its source in international trade and investment.”6
Ades and Di Tella (1999,7 19978) provide evidence that competition reduces corruption and that
industrial subsidies are associated with higher levels of corruption across countries.
Types of Corruption
It is useful to distinguish between types of corruption. Elliott (1997) provides a
useful stylization (see Figure 1). The actors in a country can be divided into three groups: private actors,
elected politicians, and non-elected public officials identified as bureaucrats and the judiciary. She goes
on to define three types of corruption:
•
Petty corruption is said to occur when private actors interact with non-elected officials, particularly
low-level bureaucrats. These transactions typically involve taxes, regulations, licensing, and
discretionary allocation of government benefits.
•
Grand corruption involves decisions that can not be made without high level officials. This includes
decisions such as procurement of military equipment, infrastructure projects, or policy decisions
about the allocation of credit or industrial subsidies.
•
The line between legitimate and illicit interactions between the private sector and politicians is more
difficult to draw. Take, for example, campaign contributions. Elliot labels this type of interaction
influence peddling, which may be legitimate or illegitimate.
Figure 1
Types of Corruption
Non-elected
officials
Private
Actors
Petty
Corruption
Grand
Corruption
Influence
Peddling
Elected officials
and politicians
Where does corruption occur?
Transparency International, an international anti-corruption
organization, publishes two useful surveys. The first, an annual Corruption Perceptions Index, measures
perceived corruption in 90 countries (see Exhibit 1). Many of the countries listed as most corrupt are
developing countries. A second survey, the Bribe Payers Index, measures the propensity of firms from
various countries to pay bribes (see Exhibit 2). It reveals that, among developed countries, the
propensity to pay bribes varies greatly.
The likelihood of encountering corruption also varies across sectors and activities. A 1999
Transparency International survey revealed that corruption was perceived to be highest in the public
2
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Corruption in International Business (A)
701-128
works, construction, and defense sectors. Perceived corruption was lowest in banking and agriculture.
Klitgaard (1988) examines government activities and reports that tax departments, police departments,
customs agencies, procurement, and distribution of international aid are most prone to corrupt activity.
Is Corruption Really a Problem?
While few commentators defend corruption on ethical grounds, some well-respected academics have
suggested that corruption can serve an economically useful function. Given an inept bureaucracy or
inefficient regulators, corruption may increase social welfare. If goods and services are being allocated
inefficiently because of bureaucratic meddling or poor regulations, side payments introduce a kind of
market mechanism that ensures goods are allocated according to willingness to pay. This is known as the
“oil in the wheels of commerce” approach. Nathaniel Leff is best known for advocating this view:
Corruption may introduce an element of competition into what is otherwise a comfortably monopolistic
industry. . . . [When] payment of the highest bribes is one of the principal criteria for allocation, the ability
to muster revenue, either from reserves or from current operations, is put at a premium. Hence a
tendency toward competition and efficiency is introduced into the system.9
That is, corruption can serve as a catalyst for reform. Political scientist Samuel Huntington makes a
similar point: “In terms of economic growth, the only thing worse than a society with a rigid, overcentralized, dishonest bureaucracy is one with a rigid, over-centralized, honest bureaucracy.”10 More
recent analyses along this line have emphasized the efficiency gains that result from transferring poorly
utilized state-owned assets to private hands, even if the assets are transferred illicitly.
An alternative view is that corruption is “sand in the wheels of commerce.” Proponents of this view
acknowledge that corruption may increase efficiency in certain situations, but note that it is difficult to
restrict it to only those situations. They also cite a variety of costs of corruption, including:
(1) Wasted resources that are devoted to corrupt activity and policy distortions;
(2) A reallocation of resources to the rich and politically powerful;
(3) The redirection of administrative energy toward creating bureaucratic barriers that allow subsequent
rent seeking; and
(4) Political costs such as public alienation and cynicism.
The Costs of Corruption
Empirical studies reveal that corruption is associated with a range of
negative macroeconomic effects. These include reduced investment and GDP growth (Mauro11),
reductions in the flow of foreign direct investment (Wei12), income inequality (OECD13), and misallocation
of government resources (Mauro14).
For managers engaged in international business, corruption has become a major concern. The World
Bank predicts that, between 1995 and 2025, more than half of world GDP growth will occur in non-OECD
countries—such as China, Indonesia, Nigeria, and India—that rank high on international corruption
indices.15 Economist Daniel Kaufmann surveyed executive education participants at Harvard University
about the cost of bribery and corruption in various countries. He reports that these executives consider
corruption “the most important economic challenge for economic development and growth for their
countries.”16 In another study, Kaufmann reports data on the “unofficial fees” that companies paid to do
business in Russia and Ukraine (see Exhibit 3).17
The U.S. Department of Commerce estimates that more than $80 billion is spent annually to bribe
public officials worldwide. The department also estimates that between 1994 and 1996, American
companies lost at least 100 overseas contracts, worth $45 billion, because of bribery. 18 Table 1 presents
one estimate of corruption costs around the world.
3
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701-128
Corruption in International Business (A)
Table 1
Corrupt Activity
Economic Cost
Bureaucrat accepts “speed money” to issue licenses.
3% to 10% premium above licensing fee.
Organized crime, with sanction of local officials, controls
and sets prices in the markets.
Goods sell at 15% to 20% premium.
Tax collectors permit under-reporting of income in
exchange for a bribe.
Income tax revenues reduced by up to 50%.
Government officials order expensive capital goods, or
overpay for public works, in exchange for kickbacks.
Goods and services priced 20% to 100%higher than
necessary.
Source: Robert Klitgaard, 1991, Controlling Corruption (Los Angeles: University of California Press).
The U.S. Foreign Corrupt Practices Act
U.S. legislation on corruption can be traced to The Corrupt Practices Act (or Tillman Act) of 1907,
which forbade contributions by corporations or to federal political campaigns. This act laid the
foundation for the Securities and Exchange Act of 1934, which Watergate special prosecutors used when
they discovered illegal contributions to the 1972 Nixon reelection campaign. Around this same time, a
series of unpleasant revelations about corrupt activities by U.S. corporations abroad led to a public
outcry. In 1976, Senator William Proxmire introduced anti-bribery legislation that was signed into law by
President Jimmy Carter in 1977. The legislation, known as the Foreign Corrupt Practices Act (FCPA),
made it illegal for U.S. firms to pay bribes to foreign government officials.
The FCPA, as amended in 1988, prohibits U.S. firms and their overseas subsidiaries and affiliates
from giving high foreign government officials either money or material items of value in return for
assistance in obtaining or retaining business. The key provisions of the law are:
•
The FCPA applies to both domestic concerns and issuers of U.S. securities. Domestic concerns include
any individual who is a citizen, national, or resident of the United States. It also includes
partnerships, associations, joint-stock companies, business trusts, unincorporated organizations, or
sole proprietorships having their principal place of business in the United States or organized under
the laws of a state, territory, or commonwealth of the United States. An issuer is defined as a
publicly-held company required to file quarterly or annual reports with the Securities and Exchange
Commission.19 This includes most firms that have issued U.S. registered securities.
•
Both issuers and domestic concerns are forbidden to make, authorize, or promise payments or
anything of value corruptly. The phrase “promise of anything of value” links corruption to intent
rather than simply to consummated acts. Payments may not be made to influence the recipient in an
official act. This includes bribes paid to prevent the performance of official acts. 20
•
Criminal penalties for violating the FCPA are as high as $2 million for a corporation and $100,000 and
five years imprisonment for an individual.21
•
The FCPA includes mandatory record-keeping provisions that require a firm’s accounts to
“accurately and fairly” reflect the firm’s transactions and to maintain a system of internal accounting
controls. While seemingly unobjectionable, the practical effect of the accounting provisions is to
discourage bribery. For example, the act makes is illegal to record a bribe as an entertainment
expense, or to not record the payment at all.
•
Payments to agents or consultants also violate the act if the company knows that such agents will
offer or give funds to a foreign official for prohibited purposes. Belief that a payment is not a bribe is
a valid defense to prosecution, but willful blindness to questionable circumstances is not. 22
•
The 1988 amendments to the FCPA added several important exceptions to the anti-bribery
regulations. These include: (1) payments that facilitate or expedite “routine government action,” such
as granting work permits or clearing goods through customs; (2) “payments that are legal under the
written laws of the host country”; and (3) “bona fide expenditures (e.g., reimbursement of travel and
lodging expenses) incurred for the promotion, demonstration, or explanation of products or services
of the U.S. business interest.”
From the FCPA’s implementation until the mid-1990s, the United States was virtually the only
country in the world where it was illegal for domestic concerns to pay bribes abroad. This caused
ongoing tension with other OECD countries—including France, Germany, and Japan—where bribes
4
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Corruption in International Business (A)
701-128
could be deducted as corporate business expenses. After intense lobbying by the U.S., 29 members of the
OECD signed the Convention on Combating the Bribery of Foreign Public Officials (CCBFO) on
November 21, 1997.
Corruption in International Business—Caselets
1.
McDonald’s in China, 1998
Control Risks, a London business risk consultant, reports that each of McDonald’s 38 outlets in
Beijing was subject to 31 miscellaneous “fees” for purposes as unlikely as river dredging, flower displays
on public holidays, and President Jiang Zemin’s spiritual well-being program. The Beijing city council
had not passed legislation specifically authorizing the fees, but city bureaucrats appeared to be within
their discretion to impose the fees.
Should McDonald’s agree to pay the fees?
2.
Enterprise Investors in Warsaw, 1990
Enterprise Investors, a newly established venture capital firm that plans to invest in Poland, is in the
process of establishing its Warsaw office. If telephones were to be obtained through official channels, the
wait would be approximately five years. If the firm is willing to pay a “hookup fee” of $1,000 per line, it
can obtain service in only a week.
Should Enterprise Investors pay for quick installation?
3.
Alpha Media in Budapest, 1994
Eighteen months after committing US $30 million to a Hungarian printing plant, the Alpha Media
Group (AMG) was targeted for an audit by the Hungarian tax authority. The audit, which was supposed
to last only two weeks, dragged on for six months. Tax auditors demanded all internal accounting
documents produced over the last five years and returned each week asking for new, and apparently
arbitrary, analyses. The firm had been assessed more than 100 compliance fines, which typically
amounted to several hundred dollars.
Four months into the audit, the local tax inspector visited AMG’s president and declared that the
problem lay with the firm’s accounting staff. The inspector concluded that the staff was beyond hope,
and he saw no end in sight to the audit. He did, however, offer a suggestion. He knew a brilliant, hardworking local accountant who could straighten out the firm’s books. This would take a few months and
would cost approximately US $45,000. Because the tax auditors were familiar with the accountant’s
work, they would feel less need to perform detailed investigations of the firm’s books.
Should Alpha Media hire the consultant?
4.
Gulf Oil in Korea, 1966
In the mid-1960s, Gulf Oil Corporation undertook a US $200 million direct investment program in the
Republic of Korea. When the program was nearly completed, the ruling political party approached Gulf
for a US $1 million contribution to finance its election campaign. The request was accompanied by
pressure which left little to the imagination. The contribution was made and The incumbent party won
reelection.
When the ruling party geared up for the next general election in 1970, a leader of the incumbent party
approached Gulf for another campaign contribution. S.K. Kim, the party representative, suggested that
US $10 million would be an appropriate contribution.23
Should Gulf Oil make the contribution?
5
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701-128
5.
Corruption in International Business (A)
Saybolt International, 1995
Saybolt International was a Netherlands-base …
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