Corruption and Bribery:
Trade and Investment Impacts

Corruption distorts markets and, like other forms of anti-competitive behaviour, damages all involved in the supply of goods and services – and ultimately national economies.

No country is immune from corruption. [1] It flourishes where the criminal justice system and governance is weak, where decision-making is unaccountable and access to decision-makers is dependent on restricted social networks, where pay is low and where management controls are weak.

Corruption deters companies from investing

The World Bank identified corruption as the biggest impediment to investment in an investment survey of nine African countries. A 2006 survey of seven countries by risk consultancy Control Risks found that More than 35% of companies surveyed had been deterred by an otherwise attractive investment because of the host countries reputation for corruption.

Corruption’s negative impact on foreign direct investment can amount to an extra 20% in tax – discouraging investment and reducing profit margins. IMF research suggests that corruption reduces investment by around 5% and that an increase of 1 point in the corruption index can result in a reduction of foreign investment by as much as 8%.

The adverse macro-economic impacts are self-reinforcing. As Control Risks notes:

If good companies avoid investing because of concerns about corruption, host countries also lose out: the investors that they attract are likely to have lower standards, both of integrity and professional competence. Reputation matters in another respect. When companies from emerging economies enter the international market, they find it harder to win the trust of partner companies.

Corruption denies companies contracts that would create jobs and have knock-on economic benefits

Companies lose business because they are unwilling to pay bribes or are out-bribed by competitors. The 2006 Control Risks Survey reports:

Overall, 43% of respondents believe that they failed to win new business in the last five years because a competitor had paid a bribe, and one-third had lost business to bribery in the last year.

Corruption drives up the cost of capital investment

Transparency International's 2005 Global Corruption Report points out that:

Capital is to an extent different each time� For example new buildings are more difficult to price than new trucks. Unlike with new trucks, the supplier – the builder – has more information about the true cost than does the purchaser. This difference in information – known as an ‘information asymmetry’ – translates into an opportunity for corruption. The direct effect of such corruption is to drive up the cost of building infrastructure – that is, the capital cost.

Corruption increases business risk

Paying bribes incurs high reputational and other risks for companies. As Control Risks points out:

Corruption demands secrecy, but there are fewer secrets in an era of rapid, worldwide communication. Those who break the rules are more likely to be found out. A corruption scandal in one part of the world will affect a company’s reputation – and its commercial prospects – thousands of miles away.

In addition, bribe paying has its own dynamic:

Once a company has a reputation for paying, officials will seek an opportunity to levy their ‘share’. It is hard to resist when a company’s earlier behaviour suggests a willingness to pay.

Sources

• OECD, ‘Anti-bribery Convention’, Preamble.
• ECGD, Bribery and Corruption.
• All Party Group on Africa, The Other Side of The Coin: The Uk and Corruption in Africa,2006
• Control Risks, International Business Attitudes to Corruption – Survey 2006.
• Christian Schiller, IMF Fiscal Affairs department, Improving Governance and Fighting Corruption: An IMF Perspective, 31st March 2000.
• World Bank, Corruption, Poverty and Inequality.
• Paul Collier and Anke Hoeffler, The Economic Cost of Corruption in Infrastructure in Transparency International, Global Corruption Report 2005.
• Control Risks, Facing up to Corruption.

Footnote

1. A common definition of corruption is the abuse of public or private office for personal gain. (Asian Development Bank, Anti-Corruption: Policies and Strategies, Description and Answers to Frequently Asked Questions, Manila, Philippines, 2000, p.1)
The UK government defines bribery as "the receiving or offering/giving of any benefit (in cash or in kind) by or to any public servant or office holder or to a director or employee of a private company in order to induce that person to give improper assistance in breach of their duty to the government or company which has appointed them." (Foreign and Commonwealth Office, UK Bribery and Corruption Law, May 2006)
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