CORRUPTION IN BUSINESS
Author – Nikhita Shelke
BUSINESS CORRUPTION AND ECONOMIC PROSPERITY
Aghion et al (2010) states that one may expect a positive relation between government and business corruption because legal and cultural standards can influence the behavior of business people and civil servants similarly and because less corrupt governments can act to reduce business corruption. Business corruption is evidently a greater concern to citizens of wealthier countries. An increase in perceived business corruption is associated with a decrease in income per capita mainly in wealthy countries. In wealthier economies, business trust has a larger role, and perceived business corruption has a stronger effect on growth. The evidence suggests that an increase in perceived business corruption leads to increase in regulation, and the marginal effect of the regulation on growth is positive. In view of the prior literature showing higher government corruption in poor countries, the idea of higher business corruption in wealthy countries may seem counterintuitive. However, the norms and mechanisms that prevent public officials from seeking private gains may not stop businesspersons from corruptly pursuing profits in wealthy countries. In some cases, the intense competition and markets in prosperous economies may actually drive businesspersons to act unethically governments regulate the entry of businesses into their markets when citizens perceive businesses to be corrupt, and this regulation positively affects economic growth on average. But the relation between regulation and prosperity is intricate. Regulation can serve the public’s interest, or it can benefit bureaucrats and politicians. Even with the best of intentions, whether regulation will help an economy is unclear.
CORRUPTION GREATER EVIL THAN SIN?
Gwin et al (2013) states that religion as a whole help sustain a social order by encouraging standards for behavior. As a consequence, religious people may be more prone to good social behavior and may then have lower tolerance of corruption. Also, religious denominations can exert different influences on attitudes toward corruption depending on whether they are hierarchical or individualistic religion. The influence of religious denomination cannot be considered as universal. The behavior of individuals can be influenced by the fact that their religion is majority or minority. Religions like Protestantism and Hinduism are less tolerant to corruption. They found that the impact of religious denominations on attitude toward corruption varies with the religious environment through the comparison of results on four multi-religious countries. Their findings also contribute to the literature on the influence of religion on economic outcomes by providing additional evidence that religion is not neutral. The main lesson from their investigation is that religion matters for institutions. As such, it cannot be ignored in the debate on the causes of economic development, even for the advocates of the key role of institutions.
NATURAL RESOUCES, GOVERNANCE AND CORRUPTION
Jeffery Sachs and Andrew Warner (1999) discussed that corruption, not abundant resources, per se, is the force behind the resource curse. The natural resource curse hypothesis posits that natural resource abundance is negatively related to per-capita GDP growth. This article examines the relationship between resource abundance, governance, and corruption in 125 nations from 2012 to 2016. The study considers various factors such as per-capita GDP, government size, trade openness, and inflation as incentives for corruption. It also incorporates measures of political stability, democracy, and cultural fractionalization as institutional controls. The focus is on natural resource rents, particularly oil rents, and their potential influence on corruption levels. The results are expected to shed light on the complex interplay between natural resources, governance, and corruption. Thus, the study’s adopted hypothesis is that, other things equal, the availability of natural-resource-related economic rents increases corruption. the focus of this study is to gain understanding into the relationship between a nation’s economic reliance on natural resources, its governmental characteristics, and a its a level of corruption.
DOES CORRUPTION BOOST OR HARM FIRMS’ PERFORMANCE?
Hanousek and Kochanova (2016) states that Corruption is often identified as a strong deterrent to growth and development. This paper proposes a conceptual framework to analyze the impact of corruption on firm performance in emerging and developing countries. The study finds strong evidence that corruption harms firm performance, with the negative impact being lessened for larger and exporting firms. The analysis highlights the importance of implementing policies to combat corruption, particularly for smaller firms. Exposure to international trade can mitigate the negative effects of corruption on performance, suggesting that exports can help shield firms from corruption. Policymakers should consider integrating competition policy into anti-corruption measures to support firm performance. Future research could explore the dynamic effects of corruption on firm performance over time and extend the analysis to non-manufacturing sectors. Their study analyzed the impact of corruption on firm performance using firm-level data from the World Bank Enterprise Surveys in 117 developing and emerging countries. They found that corruption, as perceived by firms as the biggest obstacle to their activities, significantly hampers performance across various measures such as sales growth, employment growth, productivity growth, and investment. This finding supports the idea that corruption acts as a hindrance to business operations and success. Corruption is detrimental to firm performance, and firms facing various challenges in terms of access to resources and competition may struggle to achieve optimal outcomes. Their study provides important insights into the impact of corruption on firm performance and the broader economic landscape.
DIFFERENTIAL EFFECT OF CORRUPTION ON GROWTH
Van Dijk et al (2012) states that Most firm-level studies investigate the determinants of corruption that firms experience in the business environment and the causes and consequences of corruption across various types of firms within a country. This study examines the impact of corruption on firm growth in transition economies, specifically focusing on privatized former SOEs and originally private firms. The results show that corruption has a significantly negative effect on growth for originally private firms, while it has a less adverse impact on growth for privatized former SOEs. In fact, some evidence suggests that corruption may even help privatized firms grow faster. Additionally, robustness checks using alternative measures of corruption and subsample analyses confirm the main findings of the study. Overall, the results suggest that corruption affects firm growth differently based on the firm’s origin in transition economies.
CORRUPTION – INVESTMENT OR INNOVATION
Maksmovic et al (2014) states that innovative firms pay more bribes than non-innovating firms. The article discusses the pervasive nature of corruption in daily life, particularly in the form of bribes, unofficial payments, and campaign contributions in exchange for political benefits. The article explores conflicting hypotheses on whether corruption is beneficial or detrimental to corporate activities and examines the effects of corruption on corporate investment and firm innovation in advanced and emerging economies. The findings suggest that corruption has disparate effects on investment and innovation, with a positive relation between corruption and investment in emerging economies, and a positive relation between corruption and innovation in advanced economies. The study also explores the moderating effect of diversification on the relationship between corruption and capital expenditure or innovation. The article contributes to the existing literature by demonstrating different effects of corruption across country development levels and provides insights for policymakers and entrepreneurs. The results highlight the complex relationship between corruption and corporate activities and suggest that corruption can facilitate business in certain economies. The study emphasizes the importance of considering different motives and punishments for firms operating in advanced and emerging countries. Overall, the study provides valuable insights into the impact of corruption on corporate activities and highlights the need for further research in this area.
PROTECTING THIRD PARTIES IN CONTRACTS
Douglass Cassel (2013) states that advocating for a business common law duty of care that includes human rights due diligence. Contract law is built on the idea that contracts involve not only the signatories but also third parties who play a crucial role in sustaining the contract ecosystem. Third parties, such as kinship networks and trade associations, help reduce transaction costs, improve information flows, and deter opportunism in exchanges. However, these third parties often remain hidden and overlooked in contract law, leading to potential risks and harms to them, particularly in global supply chain contracts. Supply chain contracts, in particular, can result in human rights abuses and other externalities that impact non-signatory third parties. To address this, a proposed corporate duty to consider third-party harms in contract design is suggested. This duty would require contracting parties to take into account the interests of third parties when foreseeable risks of harm are involved, encouraging them to adopt contractual provisions that mitigate such risks. By addressing Type I externalities, incentivizing prevention through oversight obligations, and filling gaps left by mandatory reporting requirements, this duty aims to protect third parties from harm in contracts and encourage responsible behavior among contracting parties. Principles such as protecting third parties from harm, incentivizing parties to avoid harmful actions through contract design, and providing legal sanctions for non-compliance are suggested as guidelines for contract law in the context of an ecosystem approach.
BLOCKCHAIN AS A RESOURCE FOR COMBATING CORRUPTION
Stefan Henningsson et al (2021) states that power of blockchain, with its capacity to provide full transactional disclosure and thereby reduce uncertainty, insecurity, and ambiguity in transactions, has been touted as being a game changer in the fight against corruption. The study discusses the use of blockchain technology as a tool to fight corruption in the global shipping industry. It highlights how traditional methods of combating corruption, such as policies and legal frameworks, are being complemented by digital technologies like blockchain. Blockchain technology has the potential to address both process-related corruption (such as improper gift giving or kickbacks) and document-related corruption on a global scale. By providing transparency and traceability to transactions, blockchain can help in identifying and preventing fraudulent activities within the industry. The study also mentions the role of institutional entrepreneurs who are leveraging blockchain and other resources to drive change and combat corruption in the shipping industry. These individuals or organizations are working towards creating a corruption-free environment by utilizing technological advancements and policy frameworks. However, the findings also acknowledges that transparency alone may not be enough to eliminate corruption entirely. There is a cautionary note that fraudsters may find new ways to exploit the system or use it to their advantage, regardless of the sophistication of blockchain technology. It is essential to remain vigilant and continuously adapt anti-corruption measures to stay ahead of those who seek to corrupt the system. Overall, the analysis emphasizes the potential of blockchain technology in combating corruption in the shipping industry while also highlighting the need for constant vigilance and improvement in anti-corruption strategies.
THE IMPACT OF IPSAS ADOPTION ON CORRUPTION
Stale-brink and Sacco (2007) states that fraud and corruption in government financial statements tend to less conspicuous compared with those in financial statements of corporate entities. Thus, on the one hand, IPSAS is a set of high-quality international accounting standards that improve comparability. In this study, the impact of IPSAS adoption on corruption in developing countries was examined using data from 77 developing countries between 2005 and 2017. The findings suggest that the adoption of IPSAS reduces corruption in these countries. Despite potential issues with discretionary measurement, IPSAS’s high disclosure and timely recognition requirements are seen as effective in preventing corruption. The study also found that the benefits of IPSAS in curbing corruption are more pronounced in developing countries that have fully adopted IPSAS compared to those using cash-basis IPSAS. This suggests that harmonization of government accounting through the adoption of IPSAS can be a useful tool in the fight against corruption in developing countries. However, the transition to IPSAS may be costly for developing countries, requiring infrastructure improvements and staff training. International financial institutions may need to provide financial resources to support the effective implementation of IPSAS. Additionally, the success of IPSAS adoption in reducing corruption relies on other administrative reforms and political commitment. Overall, the study provides evidence to policymakers of the benefits of adopting IPSAS in developing countries. It also emphasizes the importance of quality adoption and coordination between countries and international financial institutions to achieve desired outcomes. More focus should be placed on quality adoption rather than pressuring countries to adopt IPSAS. Despite limitations in data availability, the study used a large pool of data to partially overcome this challenge.
MAKING CORPORATIONS MORE HUMANE THROUGH AI
Michael Siebecker (2020) states that reconceptualizing the fiduciary duties of trust that directors owe to the corporation and its shareholders might enhance the efficacy, integrity, and humanity of corporate decision-making in the era of AI. The role of AI in corporate boardrooms is a topic of significant debate and concern due to the potential implications for decision making, ethics, and accountability. As AI technologies become more prevalent in various industries, it is crucial to establish guidelines and boundaries for their use within corporate governance. While there are ethical questions surrounding the impact of AI on human behavior and society, the inevitability of AI’s continued integration into corporate decision making necessitates a reevaluation of fiduciary duties and responsibilities. One proposed framework for integrating AI into corporate governance revolves around the concept of encapsulated trust. This approach suggests that by redefining fiduciary duties to prioritize trust in decision making, corporate boards can effectively manage the development and utilization of AI technologies. By reconceptualizing fiduciary duties around encapsulated trust, corporate boards can ensure that AI technologies are used responsibly and ethically. This approach can help to safeguard against corruption, promote moral considerations in decision making, and encourage a more diverse and inclusive approach to corporate governance. While AI may not replace human decision makers on corporate boards, it can play a valuable role in enhancing the ethical and humane aspects of decision making. In conclusion, considering the impact of AI on corporate governance requires a thoughtful approach that takes into account the ethical, moral, and societal implications of AI technologies. By incorporating the principles of encapsulated trust into fiduciary duties, corporate boards can navigate the challenges and opportunities presented by AI in a way that promotes integrity, responsibility, and inclusivity in decision making.
CONCLUSION
In conclusion, the impact of corruption on business performance, economic prosperity, and governance is a complex and multifaceted issue that requires careful consideration and analysis. From the relationship between government and business corruption to the influence of religious denominations on attitudes toward corruption, it is evident that corruption has far-reaching implications for economic growth and development. The presence of corruption can hinder firm performance, stifle innovation, and create disparities in growth opportunities, particularly in transition economies. However, the adoption of measures such as blockchain technology, IPSAS, and AI in corporate governance can serve as tools to combat corruption, promote transparency, and enhance ethical decision-making processes. By addressing corruption through a combination of regulatory frameworks, technological solutions, and ethical considerations, businesses and governments can work towards creating a more accountable and humane business environment. Ultimately, the fight against corruption requires a concerted effort from all stakeholders, including policymakers, businesses, and the wider society, to create a more equitable and prosperous world for all.
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