MNCs, Rents, and Corruption: Evidence from China

Below Boliang Zhu summaries the forthcoming American Journal of Political Science article titled “MNCs, Rents, and Corruption: Evidence from China”.

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 How does multinational corporation (MNC) activity affect corruption in developing countries? It is commonly believed that foreign investment undertaken by MNCs is beneficial to host countries through bringing in capital and technology, creating jobs, and boosting exports. Furthermore, the entry and presence of MNCs may increase market competition and help to diffuse norms and values such as economic neoliberalism, rule of law, and property rights protection. Therefore, MNC activity is expected to reduce corruption and improve domestic governance.

However, there are ample anecdotes that MNCs engage in unethical activities, such as bribery, in developing countries. Prominent MNCs, such as Alcatel-Lucent, Daimler, Pfizer, Siemens, and Wal-Mart, all have been found to bribe government officials to secure contracts and expand business in developing countries. It seems that existing accounts oversimplify the impact of MNCs on corruption. In my forthcoming AJPS article, I investigate the relationship between MNC activity and corruption in developing countries. I argue that MNC activity can lead to high corruption by increasing market concentration and thus contributing to rent creation. MNCs can accelerate market concentration in two ways: first, MNCs with advanced technology, sophisticated managerial and marketing skills, and easy access to capital are able to enter markets with high entry barriers which often deter indigenous firms in developing countries. After entry, multinationals may further enhance entry barriers for new entrants in order to pursue monopolistic or oligopolistic market positions; second, more productive MNCs can take over local firms or drive the least efficient ones out of business, thereby decreasing market competition. A concentrated market results in high rents, which, on the one hand, make firms more able to afford the costs of bribery, and on the other hand, increase government officials’ incentives of demanding bribes. Therefore, more MNC activity will lead to higher corruption levels in developing countries.

To test this argument, I conduct a case study on China—the largest developing country, and draw from data of annual procuratorial reports and of public opinion and business surveys to measure corruption levels of China’s provinces. I find that provinces with more MNC activity are strongly associated with more corruption, e.g., more recovered corrupt funds per filed case or per capita, more senior cadres involved, a higher level of perceived corruption by citizens, a higher frequency of citizens witnessing corruption, and a higher firm expenditure on entertainment and travel costs—an accounting category commonly used to reimburse illegitimate expenses in China. Furthermore, mediation analysis indicates that MNC activity contributes to high corruption levels partially through increasing market concentration.

The findings in the paper have important policy implications. It is true that foreign investment undertaken by MNCs is beneficial for developing countries’ economic growth. But, MNC activity can also generate some unintended consequences, such as corruption or bad governance more generally, posing challenges for sustainable development. While actively attracting foreign investment, governments in developing countries should devote efforts to establishing effective antitrust laws and enforcing government regulations to ensure fair competition.

About the Author:  Boliang Zhu is Assistant Professor of Political Science at the Pennsylvania State University. His article “MNCs, Rents, and Corruption: Evidence from China is currently available for Early View prior to publication in a forthcoming issue of the American Journal of Political Science.

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The American Journal of Political Science (AJPS) is the flagship journal of the Midwest Political Science Association and is published by Wiley.

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