The countries with the highest levels of corruption.

ORIGINAL PAPER

Corruption and Its Effects on FDI: Analysing the Interaction Between the Corruption Levels of the Home and Host Countries and Its Effects at the Decision-Making Level

Jose Godinez1 • Ling Liu2

Received: 30 November 2015 / Accepted: 6 November 2016 / Published online: 17 November 2016

� Springer Science+Business Media Dordrecht 2016

Abstract This study furthers our understanding of how

corruption affects the decision-making process of allocat-

ing foreign direct investment. Drawing on the responses of

28 managers in charge of establishing operations in a

highly corrupt host country, we argue that those firms

based in home countries with low levels of corruption are

more proactive in preparing to face corruption abroad than

those based in countries with high corruption levels. This

means that firms from less corrupt home countries have

strategies in place to deal with high corruption abroad. This

finding is based on the fact that these firms have stronger

pressures to not engage in corruption from their home

stakeholders. Also, these firms might not have the experi-

ence of dealing with corruption at home, which hinders

their potential to deal with corruption abroad. On the other

hand, those firms based in highly corrupt home countries

do not have clear strategies to deal with corruption abroad.

This assertion is based on the fact that these firms might

have familiarity in dealing with corruption and thus, might

not see it as an obstacle to operating abroad.

Keywords Corruption � Foreign direct investment allocation � Firm-level analysis

Introduction

Corruption, defined as the abuse of public power for per-

sonal gain (Collins et al. 2008), is an important problem

that affects all countries (Petrou and Thanos 2014). The

issue of corruption has been intensified by the fall of bar-

riers to commerce, since firms that were not used to dealing

with high corruption levels at home might be encountering

them abroad. Corruption exists at some degree in all

countries; however, it is more prevalent in developing ones

(Hellman et al. 2000). Accordingly, all firms deciding to

start operations abroad should take the level of corruption

of the host country into account when developing their

strategies for internationalisation, especially if such loca-

tion is considered developing. However, despite the fact

that current literature acknowledges that the effects of

corruption on businesses is very important (Collins et al.

2008), most studies analysing how corruption affects the

allocation of foreign direct investment (FDI) to a highly

corrupt host country have focused on whether or not cor-

ruption deters FDI inflows (i.e. Cuervo-Cazurra 2006; Doh

et al. 2003; Habib and Zurawicki 2002), without paying

enough attention to how the decision-making process of

FDI allocation at the firm level is affected by high levels of

corruption. Therefore, this study takes into account the

heterogeneity of the home country of multinationals and

sheds light in this regard by proposing a framework that

illustrates the decision-making process of allocating FDI to

a highly corrupt foreign location depending on the level of

corruption of the home country compared to the corruption

level of the host location.

Until recently, very few studies had actually analysed

how firms took corruption into consideration when decid-

ing to invest in a highly corrupt foreign location (Ro-

driguez et al. 2005). To close this gap in the literature,

& Jose Godinez [email protected]

Ling Liu

[email protected]

1 Merrimack College, 315 Turnpike St. O’Reilly Hall 418,

North Andover, MA 01845, USA

2 University of Edinburgh Business School, 29 Buccleuch Pl,

Room 2.25, Edinburgh EH8 9JS, UK

123

J Bus Ethics (2018) 147:705–719

https://doi.org/10.1007/s10551-016-3380-7

Goodspeed et al. (2011) analysed FDI flows to developing

and developed countries, concluding that the uncertainty

generated by the level of corruption of the host country has

a direct negative effect on firms investing in the former but

not the latter. Furthering this line of research, Goodspeed

et al. (2013) proposed that the main deterrent of FDI in a

developing country is the level of uncertainty created by

corruption as opposed to high taxation. Nevertheless, these

studies have mainly focused on if the level of corruption of

the host country affects the attraction of FDI rather than

how.

Addressing this dearth of research is important, because

even though many businesses declare that corruption

affects them negatively, they still engage in it. Building on

the premise that not all foreign investors perceive and react

to corruption in the same manner (Cuervo-Cazurra 2006;

Goodspeed et al. 2013), we propose that foreign investors

craft strategies differently depending on the level of cor-

ruption of their home country as compared to that of the

host country. To do so, we follow Godinez and Liu (2015)

and divide foreign investors into two categories: those

based in home countries with lower corruption levels than

the host country and those based in countries with higher

corruption levels. The rationale for this categorisation is to

understand whether those foreign investors familiar with

dealing with corruption at home react differently to cor-

ruption abroad than those investors without such experi-

ence. In this sense, we argue that those firms headquartered

in home countries with low corruption levels will have in

place a plan to deal with corruption abroad. This is justified

because of their need to be perceived ethically in their

home country, as well as the lack of experience in oper-

ating in highly corrupt locations. On the other hand, those

firms headquartered in home countries with high levels of

corruption do not devise plans to deal with corruption

abroad because they might not see this phenomenon as an

impediment for conducting operations. The next section of

the study presents a literature review on corruption and

FDI, followed by the methodology, results and discussion,

and conclusions.

Literature Review

Corruption

To study corruption one has to define it first. For this study,

we define corruption as the abuse of public power for

personal gain (Collins et al. 2008). Even though many

other definitions have been used in different studies [see,

Judge et al. (2011)], this definition is appropriate for our

study since it encompasses transactional and institutional

activities between governments and private individuals.

From this definition, scholars have identified two kinds of

corruption: public and organisational. Public corruption is

the abuse of public power for personal gain (Luiz and

Stewart 2014). Organisational corruption is the conscious

violation of legal rules of the organisation for personal

gain, possibly at the organisation’s detriment (Hodgson and

Jiang 2007). While corruption can occur exclusively in the

private sector, analysing this phenomenon is beyond the

scope of our study. Also, we focus on public corruption

since the private sector should be regulated by the public

sector of any given location. Therefore, if the public sector

is highly corrupt, we can assume that the private sector can

also be experiencing a very similar condition.

Corruption has its roots in the economic and institutional

conditions of a nation (Ufere et al. 2010) and reflects the

legal, political, economic, and cultural institutions of a

country (Svensson 2005). Corruption thrives on a weak

institutional system (Rose-Ackerman and Coolidge 1997).

This means that even though corruption is an important

problem in any society, regardless of their development

level (Collins et al. 2008), this problem is more prevalent in

developing countries (Powpaka 2002) since they are

characterised by challenging institutional environments

that include low standards of living, weak administration

capacity, underdeveloped industrial base, and low Human

Development Indices (HDI) (Collins et al. 2008; Cuervo-

Cazurra 2006; Pajunen 2008; United Nations 2014).

Therefore, when analysing how firms react and implement

strategies to operate in foreign locations characterised by

high levels of corruption, emerging markets can be con-

sidered the obvious setting.

Effects of Corruption

Shleifer and Vishny (1993) state that if bureaucrats are

self-interested and have monopolistic powers to manage

public properties, they might exploit such powers for per-

sonal benefit to the detriment of public interests. Therefore,

corruption is believed to have negative effects on economic

growth since it allows the misallocation of productive

resources, leading to sub-optimal growth rates (Halkos and

Tzeremes 2010). Jain (2001) argues that corruption violates

a country’s legislation, which undermines a nation’s

sovereignty. Corruption also has direct effects on firms

since it may act as a tax, even though participating in more

distortionary and costly corrupt activities may cause higher

transaction costs than taxes (Besley and McLaren 1993;

Shleifer and Vishny 1993). The idea of corruption

increasing costs more than taxes is developed by Shleifer

and Vishny (1993) who argue that firms engaging in cor-

rupt deals should devote human and financial resources to

manage corruption, and that these resources could have

been used more productively in other activities.

706 J. Godinez, L. Liu

123

In addition to rising costs, high corruption in a given

location also increases uncertainty, especially for busi-

nesses expanding their operations internationally (Curevo-

Cazurra 2008). The result of the uncertainty generated by

corruption may include a reduction on FDI, or a reduction

in the quality of such investment. For example, Wei (1997)

argued that corruption in a host country would negatively

affect FDI despite government policies to prevent this from

happening. Lambsdorff (1998) concluded that corruption

had a negative impact on FDI flows to developing nations

due to the difficulty of navigating their institutional envi-

ronment. Cuervo-Cazurra (2006) argued that foreign

investors from countries who signed the OECD Convention

on Combating Bribery of Foreign Public Officials in

International Transactions were also deterred by corruption

abroad. Goodspeed et al. (2013) investigated the relation-

ship between corruption, taxes, and FDI concluding that

taxes and corruption are substitutes and that the impact of

taxes on FDI will be lessened when corruption is higher.

Since corruption tends to be more prevalent and tax

administration weaker in developing countries, so the level

of development of the host country has a direct effect on

FDI flows to such location. On the other hand, Goodspeed

et al. (2013) point out that if the host country is considered

developed, corporate taxes are an important predictor for

the attraction of FDI, but not the level of corruption

because of the stability provided by the institutional envi-

ronment in those countries.

Recent scholarship has attempted to shed light on this

topic by arguing that the level of corruption of the home

and host country should be taken into consideration when

studying how corruption affects the attraction of FDI. In

this regard, Habib and Zurawicki (2002) demonstrated that

it was not only corruption what might negatively affect the

attraction of FDI but the distance in corruption levels

between home and host countries. Building on this pre-

mise, Godinez and Liu (2015) proposed that what deters

FDI is not the level of corruption of the host country but the

uncertainty created by the distance and direction of cor-

ruption levels between the home and host countries. The

authors argued that the more distance between a home

country with lower corruption levels than the host country,

the more FDI will be negatively affected. On the other

hand, if such distance is between a home country with

higher corruption levels than an already highly corrupt host

country, the corruption distance between these two coun-

tries does not affect the attraction of FDI.

Despite the wealth of studies analysing how corruption

might affect the allocation of FDI, this subject is still not

yet well understood. Even though the topic has remained

popular in the management research agenda, this problem

is elusive to study due to its secretive nature. Another

reason why corruption and its effects on FDI are not yet

fully understood may be because of the macroeconomic

method usually employed to analyse this phenomenon.

According to Yackee (2010), generally, research analysing

corruption and its effects on FDI share a similar design.

Such design includes an independent variable comprised

by an index measuring the perception of corruption. Then,

this independent variable is regressed against data mea-

suring country-level FDI flows. Regrettably, Yackee

(2010) points out that the results of these complex statis-

tical methodologies are inconsistent due to their depen-

dence on secondary data. Therefore, the return to the less

cutting-edge, but probably more informative methodolo-

gies of interviews and surveys is advised to analyse this

phenomenon.

Firms Responses to Corruption

Even though most studies analyse how corruption affects

the decision-making process of allocating FDI to a foreign

location at the macroeconomic level, there are others

looking at this phenomenon from the firm-level perspec-

tive. For instance, Collins et al. (2008, p. 101) demon-

strated that ‘‘the personal relationships of top managers

with public officials are significant predictors of engage-

ment in corruption’’. These authors also argued that support

of political activities, from top managers, have a strong

relationship with the willingness of such managers to

engage in corrupt activities. Luiz and Stewart (2014) also

studied how firms reacted to corruption when investing

abroad and proposed that managers think of themselves as

‘‘institution takers’’ and that they only respond to the

institutional conditions of the foreign locations. Nonethe-

less, the authors prove that firms can actually be proactive

in changing the institutional environment of the location

where they operate, specifically when instigating

corruption.

Understanding corruption at the firm level and how

likely managers are to engage in it has not yet been fully

understood, as most studies dealing with entering new

foreign locations only deal with issues of whether or not to

engage in corruption activities (Doh et al. 2003; Galang

2012). Although some companies are being proactive in

how they deal with corruption abroad, there is a dearth of

research dealing with specific approaches that can be used

to create strategies to deal with this problem. Therefore, we

propose to analyse how managers react to high corruption

abroad when deciding whether or not to invest in such

location. In order to do so, we decided to analyse how

managers from two different home locations (either more

or less corrupt than the host country) rationalise their plans

to enter a foreign location that is characterised by high

levels of corruption. The rationale for this design is to

study whether the strength of the home country

Corruption and Its Effects on FDI: Analysing the Interaction Between the Corruption Levels… 707

123

institutional environment has an effect on engagement in

corruption abroad.

FDI responds differently to various public policies if the

host country is considered developed or developing

(Goodspeed et al. 2013; Godinez and Garita 2016).

Separating home countries based on their quality of insti-

tutions can provide a valuable insight into how firms create

strategies to deal with corruption abroad. Based on this

premise, we propose that the level of corruption of the

home country might also play an important role when

allocating FDI in a highly corrupt host country. Such dif-

ferences might steam from knowledge developed at home

about dealing with corruption and pressures from home

constituencies regarding engaging in corrupt activities

abroad.

Research Design, Data, and Methods

In order to analyse how the corruption level of the host

country affects the decision-making process of FDI allo-

cation, this research utilised a qualitative approach. The

qualitative methodology was appropriate to generate

inferences from the respondents in an inductive manner.

Furthermore, a qualitative approach was more appropriate

for this study since our aim was to analyse the perception

of corruption and its effects on the decision making process

of allocating FDI rather than a quantification of such

effects. Therefore, to generate the data needed for this

study, we utilised semi-structured interviews. This format

was preferred because it allowed us an informal setting for

questioning to suit the needs of each participant. Also, the

semi-structured interviews allowed us the flexibility to

clarify responses or pursue emergent issues (Bryman

2008).

Setting

Guatemala was chosen to conduct this study. The reason

for using Guatemala as the setting for our study is because

of its high corruption levels (Transparency International

has ranked Guatemala in the 123rd place in the world, out

of 177 countries) (Transparency International 2014). In

fact, several members of the Guatemalan government have

been facing allegations of corruption, which resulted in the

resignation and incarceration of the country’s former

president and vice-president (Malkin 2015). Despite of

Guatemala’s high corruption levels, the country is the

second largest recipient of FDI in Central America with a

GDP of $53.80 billion in 2014 and receives the largest

amount of FDI in the Central American region, which

accounted for $1.308 billion during the same year (World

Bank 2014).

The high levels of corruption in Guatemala are

explained by its levels of inequality and its transition from

a lengthy civil war. According to Rose-Ackerman (2008),

inequality within a nation is a predictor of high corruption.

In the case of Guatemala, the United Nations Development

Programme ranks it as one of the 20 most unequal coun-

tries in the world (UNDP 2009). Also, scholars analysing

corruption point out that nations transitioning from an

internal conflict are usually characterised by weak institu-

tions, which are fertile grounds for corruption (Rose-Ack-

erman 1997, 2008). Thus, due to its levels of corruption

and FDI inflows, Guatemala is an adequate location to

analyse how the corruption level of the host country affects

the decision-making process of allocating FDI to a highly

corrupt foreign location.

Data Collection

Data collection took place in two phases: from June to

August 2012, and from June to July 2014. Data were col-

lected by contacting all foreign firms that had invested in

Guatemala since 2007. The reason for contacting these

firms was to be able to talk to those individuals who had an

active participation in the decision-making process of

investing in the country. Once all firms were contacted, 28

firms agreed to allow us to interview managers who were

involved in the decision regarding investment in a highly

corrupt foreign location. The interviews were semi-struc-

tured in order to increase the focus and depth of the issue at

hand. The interviewees had the choice of being interviewed

in English or Spanish by the lead author. Those interviews

conducted in Spanish were translated to English and then

back to Spanish to corroborate their accuracy. Each inter-

view lasted between 60 and 90 min and followed standard

protocols to capture emerging themes in field research

(Strauss and Corbin 1994), and was recorded and

transcribed.

After the first round of interviews (six interviews), we

decided to focus our data collection on a small number of

steps used in the process of allocating FDI to a highly

corrupt host location. To do this, a theoretical sampling

was applied (Denzin 1989), which is recommended for

analytical induction (Bansal and Roth 2000) in order to

identify such steps. This approach was taken in order to

capture a broad set of beliefs and practices during the

decision-making process of allocating FDI to a corrupt

location within the sample. In this manner, we followed

Mair et al. (2012) who propose to use the cases to arrange

and stimulate data analysis, instead of using them as a

method to expose variance.

After analysing the preliminary results of the first six

interviews, five main steps were identified as the main

process used by managers to invest in a highly corrupt

708 J. Godinez, L. Liu

123

foreign location. The investor’s characteristics depending

on the corruption level of their home country (more or less

corrupt than the host country); previous knowledge of

dealing with corruption; perception of corruption; uncer-

tainty created by corruption distance; and strategy to deal

with corruption. Once these areas of interest were identi-

fied, 22 additional interviews were conducted. Together

with the first round of interviews, the data gathered was

then used in a repetitive manner to compare information

across informants and to analyse important points of syn-

ergy (Glaser and Strauss 1967).

Analysis

The data were analysed in two phases in order to go back

and forth between emerging theoretical arguments and the

data, following Mair et al. (2012). Before any analysis, a

narrative account of findings was arranged in a chrono-

logical manner. The historical account revealed a method

to arrange the data around the steps utilised to invest in a

highly corrupt host location. The qualitative analysis was

carried out with the help of NVivo 9.0. The first six

interviews included three from investors located in home

countries with higher corruption levels than the host

country and three from less corrupt host countries. In this

manner, we developed a code system that allowed us to

understand how the level of corruption of the home country

affected the process of investing in a highly corrupt host

location. After the data were collected, it was subjected to a

manifest analysis of the condensed narratives, following

Berg (2004). The analysis was carried out by identifying

phrases commonly employed by the respondents, then by

identifying justified descriptions. Based on these analyses,

we were able to examine how the difference in corruption

levels of the home and host country affected the decision-

making process of allocating FDI to a highly corrupt host

country.

The first stage of formal analysis consisted of corrobo-

rating whether there were differences between how inter-

viewees saw and responded to corruption based on the

corruption level of their home country as compared to that

of the host location with open coding. In order to carry out

this stage, we relied on institutional theory that proposes

that firms will seek legitimacy by conforming to their

social context (Glynn and Abzug 2002). Nevertheless,

gaining legitimacy is a difficult process due to the different

institutional environments in which such firms operate

(Kostova and Zaheer 1999). However, the data corrobo-

rated that those firms headquartered in countries with high

levels of corruption were able to achieve legitimacy in a

highly corrupt host country since such institutional envi-

ronment resembled that of their home country. On the

contrary, those firms located in countries with low

corruption levels had a more difficult time adapting to the

institutional environment of a host country characterised by

high corruption levels.

The second stage of formal data analysis centred on

investigating how managers rationalised their investment

decision in a highly corrupt host country in relation to the

two identified home countries, either more or less corrupt

than the host country. The emphasis was placed on the

remaining four steps of allocating FDI, even though it

would have been possible to identify a greater number of

activities. The rationale for focusing on these steps is

because during the analysis, it became apparent that these

areas were consistently emerging from all the interviews.

Therefore, the decision was made to carry an extensive

analysis of these steps. The analysis in this stage was

carried out by creating provisional categories and first-code

orders (Van Maanen 1979). With the help of NVivo 9.0, it

was possible to maintain a record of emerging categories

and to see comparable coded texts concurrently, which was

useful to manage the large dataset. Following Miles and

Huberman (1994), the first categorical codes offered labels

for different activities. The codes were created to mirror

the words used by the interviewees, which included, for

example, ‘‘being used to dealing with corruption’’, ‘‘prob-

lems associated with corruption’’, and ‘‘being prepared to

deal with corruption’’.

After analysing the first order of codes, an axial coding

was utilised (Strauss and Corbin 1994). The second order

of codes was used to provide meaning to how respondents

rationalised their process of understanding corruption and

creating a process to allocate FDI in a highly corrupt host

country. In this procedure, an inductive process was uti-

lised to identify a more abstract and theory rich construct of

the data. In this stage, the data gathered and analysed was

used to understand how managers allocated FDI to a highly

corrupt host location and to provide the theoretical impli-

cations of this process.

Results and Discussion

This study explores how corruption affects the decision-

making process of FDI allocation. The analysis is com-

prised by the experiences and views of managers who had a

direct role in deciding whether or not to invest in a highly

corrupt foreign location, their previous experience and

preconceived conceptions of corruption, and the conceptual

and practical steps involved in minimising the effects of

corruption when investing abroad, as presented in Fig. 1.

This section presents an analysis and decision-making

model of allocating FDI in a highly corrupt host country.

The results in this section emphasise the importance of the

corruption level of the country where firms are

Corruption and Its Effects on FDI: Analysing the Interaction Between the Corruption Levels… 709

123

headquartered when creating strategies to deal with cor-

ruption abroad.

Investors Characteristics

The characteristics of respondents for this analysis are

presented in Table 1. The names of respondents and MNEs

are not shared to protect the identity of the participants due

to the sensitive nature of this research. All respondents

represent MNEs operating in the services industry. In other

words, all the investments made in the host country can be

classified as market-seeking. The respondents were iden-

tified as members of an MNE that had recently (within the

last 5 years) established operations in Guatemala.

Respondents also had to have actively participated in the

decision-making process of investing and subsequent

operations in the host country. As previously mentioned,

the respondents were divided into two groups: MNEs

headquartered in countries with lower levels of corruption

than the host country and MNEs headquartered in countries

with higher corruption levels than the host country. This

distinction was made in order to compare how corruption

abroad affects those foreign investors that are familiar with

corruption at home compared to those without such expe-

rience. Also, the corruption distance and direction between

the home and host country are provided, as well as the

number of other subsidiaries in Latin America.

Previous Knowledge of Dealing with Corruption

After conducting all the interviews with managers of firms

with higher levels of corruption than the host country, it

was evident that all of them had extensive experience with

dealing with corruption. This experience was developed

when operating in their home country as well as in other

countries that had corruption levels similar to that of the

home country. However, not all of them acquired such

experience in the same manner. For instance, Investor 1

argued that ‘‘knowledge of how to deal with corrupt offi-

cials can be acquired at home’’. This view was supported

by investors 2, 4, 7, 8, and 14 and supports previous claims

that firms can learn to operate in challenging environments

and deploy such knowledge abroad, as proposed by

Buckley et al. (2007) and Cuervo-Cazurra and Genc

(2008).

All investors from home countries with higher corrup-

tion levels than the host country agreed that they acquired

knowledge of how to deal with corruption at home. How-

ever, some of them did so implicitly (See Table 2 for a

summary of illustrative comments from respondents). An

example of this is Investor 10, who stated that ‘‘nothing can

fully prepare you to deal with corruption abroad; but, after

having operations in the country you learn what to expect’’.

Investor 3 had a similar view to Investor 10, claiming that

‘‘no one can totally learn how to deal with corruption at

home or abroad. But, the experience at home taught us

where we should expect illegal claims’’. In a similar view,

Investor 8 argued that ‘‘there is no need to know how to

deal with corruption. You should learn to deal with people

of different customs and that experience can be acquired at

home’’.

Table 3 presents a summary of responses from man-

agers headquartered in countries with lower corruption

levels than the host country when asked about acquiring

knowledge to deal with corruption with varied responses.

In this sense, many foreign investors argued that corruption

is an important problem that is severely punished at home,

even if the corrupt act is committed abroad. Thus,

according to these investors (Investors, 18, 20, 23, and 26),

they did not have the opportunity to learn how to deal with

corruption either at home or in the other foreign locations

where they operate. On the other hand, other investors from

countries with lower corruption levels than Guatemala

(Investors 15, 19, 22, 24, and 25) argued that corruption

Investor’s Previous knowledge Perception of Uncertainty Strategy to deal characteristics of Dealing with Corruption Created by with Corruption

Corruption Distance Abroad

Host country corruption

More corrupt than host country

Less corrupt than host country

Yes

No

Part of business culture

Important problem

Will not increase with (+) corrup�on distance

Increases with (-) corrup�on distance

No

Yes

Foreign Direct Investment

Fig. 1 Corruption and how it affects the decision-making process of allocating FDI

710 J. Godinez, L. Liu

123

although bad, can be seen as a ‘‘means to an end’’. It is

plausible that these investors argue for a more benign

nature of corruption, since the corruption levels of their

home countries are close to those of Guatemala, according

to Transparency International (Transparency International

2014).

From an institutional theory point of view, these

findings mean that the level of corruption of the host

country, as compared to that of the home country, mat-

ters when analysing FDI flows to a highly corrupt host

location. This finding validates that at the firm level with

a qualitative approach, the results proposed by Good-

speed et al. (2013). Also, these results suggest that

managers can develop the capacity to operate in a par-

ticular institutional environment (Johanson and Vahlne

1977). Managers, in this sense, generate assumptions that

influence how their firms operate in an external envi-

ronment and are able to deploy them in similar foreign

environments. In the case of MNEs headquartered in

highly corrupt countries, this means that a foreign envi-

ronment that can be considered as ‘challenging’ by some

managers, cannot be considered as such if a manager had

the opportunity to learn how to operate in it at home. On

the other hand, firms located in home countries with low

corruption levels might face considerable problems

achieving legitimacy in a foreign environment charac-

terised by high corruption. The difficulties to achieve

legitimacy arise from the complexity of the different

institutional environments in which an MNE operates

(Kostova and Zaheer 1999). When talking about a firm

operating in a highly corrupt host country, this means

that MNEs without knowledge of how to operate in such

conditions might have difficulties assessing their critical

constituencies (Scott 1995) and might face strong pres-

sures at home to not engage in corruption abroad

(Cuervo-Cazurra 2006).

Table 1 Profile of respondents Investor Home country Corruption distance

and direction

Amount invested in past

5 years (US$)

No. of subsidiaries in

Latin America

I1 Honduras -3 Up to 1 million 2

I2 Vietnam -1 Between 10 and 20 million 6

I3 Guyana -2 Between 5 and 10 million 4

I4 Honduras -3 Up to 1 million 3

I5 Vietnam -1 Between 5 and 10 million 4

I6 Venezuela -13 Between 5 and 10 million 5

I7 Nicaragua -4 Between 10 and 20 million 8

I8 Honduras -3 Between 5 and 10 million 4

I9 Russia -5 Up to 1 million 3

I10 Paraguay -8 Between 5 and 10 million 4

I11 Russia -5 Between 1 and 5 million 3

I12 Turkmenistan -15 Between 10 and 20 million 6

I13 Nicaragua -4 Up to 1 million 2

I14 Nicaragua -4 Between 1 and 5 million 3

I15 China 4 Between 10 and 20 million 5

I16 Canada 49 Between 10 and 20 million 7

I17 Mexico 3 Between 20 and 30 million 9

I18 USA 42 Between 30 and 40 million 7

I19 Mexico 3 Between 5 and 10 million 5

I20 Canada 49 Between 20 and 30 million 8

I21 Germany 47 Between 10 and 20 million 6

I22 China 4 Between 30 and 40 million 10

I23 USA 42 Between 5 and 10 million 4

I24 China 4 Between 20 and 30 million 6

I25 Spain 28 Between 10 and 20 million 6

I26 USA 42 Between 30 and 40 million 7

I27 Germany 47 Between 10 and 20 million 6

I28 Spain 28 Between 5 and 10 million 4

Corruption and Its Effects on FDI: Analysing the Interaction Between the Corruption Levels… 711

123

Perception of Corruption and Engagement

in Corruption Abroad

Responses from MNEs headquartered in home countries

with higher levels of corruption than the host country

agreed that corruption was a problem. For example,

Investor 1 declared that ‘‘corruption is morally wrong’’.

Other respondents argued that corruption is one of the most

important problems that they have to face when deciding to

start operations in a foreign location and to continue their

activities in such places (Investors 3, 5, 6, 8, 9, 10, and 12).

These responses are in line with the general view that

corruption has a negative effect on businesses (Doh et al.

2003; Wei 1997). Nonetheless, twelve respondents, out of

fourteen, justified the existence of corruption. In this sense,

respondents argued that even though corruption is detri-

mental for their businesses, they had to comply with it to

remain in businesses. For instance, Investor 9 argued that

‘‘corruption is wrong but if I do not comply, we go out of

business and we cannot offer employment’’. This view was

echoed by all respondents as summarised in Table 4,

except Investors 2 and 7, who declared that ‘‘corruption

should not exist’’ and that ‘‘firms should not engage in it’’.

Despite their negative views on corruption, all fourteen

respondents from MNEs based on countries with higher

levels of corruption than the host country admitted to have

had participated in corrupt deals abroad. In fact, to some

degree, all respondents agreed that corruption was just part

Table 2 Knowledge of dealing with corruption from managers headquartered in countries with higher corruption levels than the host country

Investor Illustrative quotes

I1 Of course knowledge of how to deal with corrupt officials can be acquired at home. We learned what corrupt officials want and how

we can provide it. In this manner we ensure that we can remain in business

I2 If you think of it, Vietnam and Guatemala aren’t that different. Businesses want to operate and government workers want to

supplement their income. In this sense, we have plenty of practice at home of how to help both parties reach their goals

I3 Corruption is different in different places. This means that no one can totally learn how to deal with corruption at home or abroad. But,

the experience at home taught us where we should expect illegal claims and how to deal with them

I4 At home [Honduras] we have been dealing with corrupt officials since we started our business. That experience has definitely helped

us operating abroad. We learned very early that there are certain expectations for businesses to be able to secure contracts and

acquire licenses, for example

I7 Yes, we have had to deal with many corrupt public officials at home. This experience gave us enough practice to know how to

maneuver corrupt officials abroad, especially since our countries are very similar

I8 Government officials are the same everywhere. We had the chance to learn to deal with them at home and we realized that officials

abroad aren’t that different

I9 Companies should not be too worried about learning to deal with corruption. Instead, they should learn how to deal with people of

different customs and that experience can be acquired at home

I10 Nothing can fully prepare you to deal with corruption abroad; but, after having operations in the country, you learn what to expect and

how to deal with different requests

I14 We have had to learn to collaborate with corrupt officials at home. They have a goal and we have ours. It is the same in other countries

Table 3 Knowledge of dealing with corruption from managers headquartered in countries with lower corruption levels than the host country

Investor Illustrative quotes

I15 We had adapted to co-exist with corruption. Sometimes we have to comply but we try not to

I18 Absolutely not. Of course there is corruption at home but nothing even close than Guatemala

I19 We try to avoid doing corrupt deals as much as we can even though sometimes it is difficult, especially with low level officials asking

for small bribes

I20 I am sure there is corruption at home but we have a zero tolerance policy at home and abroad

I22 Corruption at home is not uncommon. However, due to cultural differences I do not believe that corruption at home helped cope with

corruption in Guatemala

I23 Not interested in learning

I24 We had learned to maneuver in conditions considered less than ideal

I25 You could learn to deal with corruption if you wanted to. Either learn to engage on it or how to avoid it

I26 No, at home it is known that there is corruption in government contracts but we do not participate in those

712 J. Godinez, L. Liu

123

of doing business in Guatemala. Investor 4 is a good

example of this finding by declaring that ‘‘if we wanted to

be awarded contracts, we had to participate in corrupt

deals’’. Investor 13 also said that ‘‘we had no choice but to

comply with the local customs’’. This result might confirm

that those foreign investors based in highly corrupt home

countries might internalise knowledge of how to deal with

corruption at home and deploy it abroad. Also, this finding

shows that foreign investors from countries with high

levels of corruption are aware that corruption is wrong but

they choose to engage in it nevertheless, as illustrated in

Table 4. Thus, this result may indicate that those MNEs

headquartered in home countries with high levels of cor-

ruption might not face pressures from stakeholders at home

to not engage in corrupt deals abroad.

When talking to respondents from MNEs headquartered

in countries with lower levels of corruption than the host

country, it was evident that they also saw corruption as an

important problem. Out of fourteen respondents, nine

argued that corruption was detrimental for their businesses

and for society in general. However, these investors dis-

agreed on how much of a problem corruption really was.

For example, Investor 20 declared that ‘‘corruption is a

cancer of a society’’. Investor 16, on the other hand, argued

that ‘‘corruption is a major impediment for conducting

business abroad but it is not the only factor to be consid-

ered’’. Nevertheless, all respondents declared that corrup-

tion was detrimental for their businesses and that it even

decreased the amount of investment allocated in a foreign

location.

The main difference between MNEs headquartered in

countries with lower level of corruption than the host

country, and those with higher corruption levels, was that

those MNEs with low levels of corruption at home were

less likely to engage in corruption abroad, as presented in

Table 5. According to investors 18, 20, 21, 23, and 26, they

not only have regulations at home preventing them from

engaging in corruption overseas but also internal policies to

minimise the risk of engaging on corrupt deals abroad.

Also, investors 15, 16, 19, 22, 24, 25, and 27 declared that

they too ‘‘try to avoid’’ corrupt deals abroad when possible.

An example of how foreign investors try to avoid corrup-

tion abroad was provided by Investor 27 who said that

when it is necessary, they rely on their local partners to

carry out certain operations that might not be perceived as

totally ethical. This finding confirms the long held idea that

corruption has a negative effect on MNEs. However, the

negative effect of corruption on a business might be even

more detrimental if the MNE is headquartered in a country

with lower levels of corruption than the host country.

The results of the perception of corruption depending on

the corruption level of the home country as compared to

that of the host country, means that the location where a

manager spent his/her formative years has a direct influ-

ence on how such manager views corruption. Institutional

theory has been utilised to understand how organisational

structures and processes become institutionalised over time

(Oliver 1991). The fundamental premise of this theory is

that MNEs have tendencies to conform to predominant

norms and traditions of the location in which they operate

(Meyer and Rowan 1977). In turn, such tendencies lead to a

homogeneity amongst the structures of an MNE and its

activities that is shaped by social pressures (Oliver 1997).

In the case of corruption, it means that a manager’s per-

ception of corruption is directly linked to the corruption

level of their home country.

Uncertainty Created by Corruption Distance

Corruption can be seen as a tax on MNEs (Mauro 1995),

but the greatest challenge it poses on firms might not be the

costs themselves, but the uncertainty regarding the actual

Table 4 Perception of corruption and engagement in corruption abroad from managers headquartered in countries with higher corruption levels than the host country

Investor Illustrative quotes

I1 Corruption is morally wrong. However, sometimes it is necessary to continue in business

I2 Corruption is deplorable and should not exist and firms should not engage in it.

I3 Corruption is wrong, but it is understandable since some public officials need to complement their wages

I4 I do not believe that there is such thing as corruption. People only have different business cultures and it is our job to figure out how to

operate in each one

I5 Corruption is wrong but if I do not comply, I do not have a business and cannot offer employment

I6 It should not be acceptable but it is the only way to do business sometimes

I7 Corruption is wrong. It should not be acceptable

I8 Corruption is part of doing business anywhere

I9 Corruption should not exist but it does. If we do not participate we will go out of business

I11 Corruption is wrong but that is how business is conducted

Corruption and Its Effects on FDI: Analysing the Interaction Between the Corruption Levels… 713

123

costs that the firm will need to pay to a corrupt foreign

official (Wei 1997). While previous studies agree that the

uncertainty created by corruption might be more detri-

mental to foreign investors than the actual corruption level

(Curevo-Cazurra 2008; Fisman and Miguel 2007), little is

known about how such uncertainty affects the decision-

making process of allocating FDI to a highly corrupt host

country. In this research, the majority of respondents of

MNEs based in countries with high levels of corruption

agreed that uncertainty was not a characteristic of the

Guatemalan market. According to these investors, they had

previous knowledge of the corruption levels of the host

country and how to manoeuvre through it. When asked a

question regarding uncertainty, Investor 3 replied that ‘‘no

one is surprised about the levels of corruption in Guate-

mala’’. To further this point, Investor 8 argued that its firm

‘‘knows how to do business where they decide to operate’’.

This sentiment was shared by investors 5, 6, 7, 9, 10, and

11. However, even though most investors based in home

countries with high levels of corruption declared that the

uncertainty created by corruption was minimal in Guate-

mala, they agreed that corruption had detrimental conse-

quences. According to Investor 7, ‘‘the uncertainty created

by corruption was minimal but it did increase their oper-

ating costs’’. This finding, illustrated in Table 6, is in line

with the conclusions reached by Cuervo-Cazurra (2008)

and Uhlenbruck et al. (2006) who argued that the levels of

arbitrariness of corruption are more detrimental to foreign

investors than its levels of pervasiveness.

In general, respondents from MNEs headquartered in

countries with lower levels of corruption than the host

country declared that they had knowledge that Guatemala’s

was considered highly corrupt. Nevertheless, the uncer-

tainty it created when deciding how to operate in the

country was a great impediment for doing businesses there

(Collins et al. 2008), as presented in Table 7. In this study,

nine respondents (out of fourteen) argued that uncertainty

generated by corruption was a concern when deciding to

start operations in Guatemala. These respondents also

voiced that uncertainty was an obstacle to operate in a

highly corrupt host country. In fact, respondents 15, 17, 19,

and 20 argued that local officials in Guatemala can request

unlimited bribes. Other respondents, such as Investors 16,

17, 25, and 28, agreed that the costs associated with cor-

ruption in Guatemala were predictable, and hence, uncer-

tainty generated by corruption was minimal.

Corruption is distinct in different countries in both the

reach throughout the economy (Uhlenbruck et al. 2006),

and the uncertainty it creates (Chakrabarty and Bass 2013).

A host locations characterised by high uncertainty derived

from corruption might require several ineffectual corrupt

transactions from foreign firms. Moreover, under a weak

administrative governance, government officials might be

willing to change the set of necessary approvals without

giving notice to receive maximal bribes (Shleifer and

Vishny 1993). Therefore, firms without previous knowl-

edge of how to deal with corruption might suffer negative

effects when operating in a foreign location characterised

by high uncertainty created by corruption. However, this

study finds that the uncertainty created by high corruption

has detrimental effects on foreign investors when such

investors are located in countries with low levels of

corruption.

Furthermore, such negative effects are exacerbated with

a higher corruption distance between the home and host

countries. On the other hand, corruption distance appears to

not have an effect on firms located in a home country that

has higher corruption levels than an already highly corrupt

host location. This finding is explained because such firms

have been equipped with developed knowledge regarding

operating in highly corrupt countries and are able to deploy

such knowledge to operate abroad. Also, this finding can be

explained because firms located in a highly corrupt home

country might not face strong pressures to not engage in

corruption abroad from home country stakeholders.

Strategic Measures to Deal with Corruption Abroad

Most studies analysing corruption and FDI agree that

corruption has a negative effect to various degrees on

foreign investment (Cuervo-Cazurra 2006; Doh et al. 2003;

Habib and Zurawicki 2002). In addition to market

Table 5 Perception of corruption and engagement in

corruption abroad from

managers headquartered in

countries with lower corruption

levels than the host country

Investor Illustrative quotes

I18 Corruption is wrong and should be combatted

I19 Corruption is wrong and delays processes

I20 Corruption is a cancer of a society

I21 Corruption is morally wrong and affects an entire society

I22 Corruption increases prices and diminishes reputations

I24 Corruption should not exist and business should be transparent. That is not always the case

I26 Corruption is illegal at home and anywhere we operate

I28 Corruption is wrong and should not happen, but it does

714 J. Godinez, L. Liu

123

avoidance, mutational enterprises have made great efforts

to explore different ways to lessen the sensitivity of the

affects and to engage in FDI activities (for example, trad-

ing favours). However, fewer studies have analysed

strategic responses of MNEs when the decision of investing

abroad has been made. To address this gap in the literature,

Luiz and Stewart (2014) argue that some firms have created

anti-corruption policies with strict anti-corruption partici-

pation mandates even though the authors argue that for

some companies, sometimes participating in corrupt deals

is unavoidable. Building on their work, this study shows

that there is a great difference between MNEs based in

countries with low levels of corruption and MNEs based in

highly corrupt countries, when talking about strategies to

deal with corruption abroad. In general, MNEs based in

home countries with high corruption levels do not have

formal strategies to deal with corruption abroad. Of the

fourteen MNEs studied, only four declared to have a

strategy to deal with corruption abroad (Investors 1, 2, 5,

and 6). Nevertheless, their strategy was to allocate

resources to their budget to pay for bribes. Therefore, while

these investors describe themselves as proactive, they are

still participating in corrupt deals abroad, as exemplified in

Table 8.

The responses from MNEs based in countries with lower

levels of corruption than the host country showed that in

general these firms have strategies to deal with corruption

abroad (Table 2). In line with Luiz and Stewart (2014),

Investors 15, 16, 18, and 20 declared that their main

strategy to deal with corruption was avoidance. These

investors argued that they avoided conducting business

with the local government when possible. Other respon-

dents went further and declared that their organisational

structure was designed to be as transparent as possible

(Investors 21, 23, 24, and 25). These investors declared that

they had the mandate from headquarters to adhere to a

strict code of conduct, as Table 9 illustrates. Such code of

conduct required that all negotiations with local govern-

ment officials and/or business partners be recorded and

attended by at least two members of the MNE. Moreover,

these investors argued that they had clear transparency

procedures in place to hire suppliers. However, there were

investors that declared not to have strategic measures in

place to deal with corruption abroad (Investors 17, 22, and

28), which might be because their levels of corruption,

although lower than Guatemala, can still be considered

high.

Another approach used by firms from less corrupt

countries when investing in Guatemala was to have a

decentralised approach. While some investors declared that

their strategy to deal with corruption was to avoid it, others

argued that they preferred their strategy to have some

Table 6 Uncertainty created by corruption from managers headquartered in countries with higher corruption levels than the host country

Investor Illustrative quotes

I2 When investing in Guatemala we had knowledge of the problem in the country. Uncertainty was minimal

I3 There is no uncertainty due to corruption. No one is surprised by corruption in Guatemala

I4 There is no uncertainty if you know what you will encounter

I6 There is no uncertainty when you know what to expect

I8 Not uncertain, we know how to do business where we operate

I9 Corruption increases prices but we know how to deal with it

I13 Corruption expedites processes but increases prices

Table 7 Uncertainty created by corruption from managers headquartered in countries with lower corruption levels than the host country

Investor Illustrative quotes

I16 Corruption occurs more often when doing business with the government. We try to avoid that

I17 Corruption in Guatemala is very predictable as well as its costs

I19 Uncertainty can be high but once officials see how we do business they do not bother us

I20 We do whatever we can to avoid engaging in corruption

I23 Corruption erodes an organization’s image, increases costs, increases poverty

I25 Increases costs and sometimes prevents us from doing business with the government (when we refuse to pay)

I26 Corruption worsens poverty, promotes inequality and increases costs to everyone

I28 Corruption makes access to permits and contracts more difficult. Those with connections have an advantage

Corruption and Its Effects on FDI: Analysing the Interaction Between the Corruption Levels… 715

123

‘‘room for interpretation’’ to account for variations in the

host countries where they operate. This approach was put

in place to adhere to the host country’s local norms, such as

the acceptance of hospitality. Nevertheless, these firms also

had a high transparency requirement that made it necessary

for managers to record and report all gifts received when

conducting businesses there. Table 10 presents a summary

of the main findings of this study.

Conclusions

This study analysed how the corruption level of the host

country affects the decision-making process of allocating

FDI to a highly corrupt foreign location. Based on insti-

tutional theory, this study analysed two kinds of corruption,

public and organisational (Luiz and Stewart 2014), and

how such corruption affects MNEs investing in a highly

corrupt foreign location. In order to answer the question, 28

interviews were carried out with managers of MNEs that

had recently invested in Guatemala. Following the work of

Godinez and Liu (2015), we divided the respondents into

two groups: MNEs headquartered in countries with higher

corruption levels than the host country, and MNEs head-

quartered in countries with lower corruption levels than the

host country. The classification of home countries as either

more or less corrupt than the host country was made to

compare and contrast reactions to corruption abroad based

on the experience foreign investors had at home regarding

how to deal with corruption and if such experience could

be utilised abroad (Goodspeed et al. 2013). The results

show that firms based in home countries with lower levels

of corruption than Guatemala were negatively affected by

corruption in the host country. On the other hand, those

MNEs based in home countries with higher levels of cor-

ruption than the host country were not as negatively

affected when investing in a foreign country characterised

by high levels of corruption.

Corruption is believed to have negative effects on eco-

nomic growth (Halkos and Tzeremes 2010). Corruption

acts like a tax. Firms devote resources to manage corrup-

tion but those resources could be better allocated (Shleifer

and Vishny 1993). Corruption is also believed to have a

negative effect on foreign investors (Godinez and Garita

2015). However, building on the foundation that not all

foreign investors are equal (Cuervo-Cazurra 2006), we

argue that those foreign investors based in home countries

with lower levels of corruption than the host country might

not be as likely to engage in corruption abroad. On the

other hand, those investors from MNEs based in countries

Table 8 Strategic measures to deal with corruption abroad from managers headquartered in countries with higher corruption levels than the host country

Investor Illustrative quotes

I1 On our business plan we allocated money for payments to local officials

I2 We already knew that several requests were going to be made. We had to account for those expenses when devising our plan

I3 Our institution does not have a plan to deal with corruption abroad, as far as I am concerned

I7 We know how to operate in these kinds of countries. There is no need to create formal strategies to do what we already know how to

do

I13 This company does not have formal norms about dealing with corrupt government officials

Table 9 Strategic measures to deal with corruption abroad from managers headquartered in countries with lower corruption levels than the host country

Investor Illustrative quotes

I15 Our main strategy is to avoid doing business with local government. If necessary, we hire a local company to do deal with them for us

I17 Our company does not have clear strategic measures to deal with corruption abroad. We just try to do the right thing

I18 Avoid doing business with local government. Clear code of conduct applicable to all of our employees

I20 I am not sure if this is considered a strategy, but we have a clear code of conduct applicable to all of our employees which is zero

tolerance to corrupt behavior

I24 If my memory serves me well, we have a petty cash budget to deal with small requests mainly from low level bureaucrats

I26 We follow the code of conduct when doing business abroad in place by our firm. We also exercise our discretion always acting

ethically

716 J. Godinez, L. Liu

123

with high levels of corruption might be more likely to

participate in corrupt deals in foreign locations. While

studies analysing corruption and its effects on FDI have

seen MNEs as institutional takers (Luiz and Stewart 2014),

we argue that MNEs can actually be more influential in the

institutional arrangement of a foreign location than previ-

ously thought. We base this conclusion on the fact that

those MNEs familiar with dealing with corruption at home

can actually seek out other corrupt countries to establish

new operations. On the other hand, those firms based in

countries with low levels of corruption might try to avoid

engaging in corruption abroad and actually have policies to

ensure they operate corruption free abroad.

Finally, while firms should have strategies to deal with

corruption (Luiz and Stewart 2014), this study found,

however, that those MNEs from countries with higher

levels of corruption than the host country did not have

strategies in place to deal with corruption abroad.

Respondents from these firms argued that corruption was

just a part of doing business and that no specific strategies

were needed. On the other hand, those firms located in

countries with lower corruption levels than Guatemala

attributed their success in the country to their strategies to

deal with the country’s corruption. These investors argued

that their strategies to deal with corruption included a clear

policy to avoid doing businesses with the local govern-

ment, as well as a well-designed organisational structure

that allowed transparency.

Limitations and Future Research

This study has many limitations. Due to the qualitative

nature of this analysis, we were able to study in depth how

corruption affects the decision-making process of allocat-

ing FDI to a corrupt foreign location. However, qualitative

studies rely on a restricted number of respondents. For this

reason, future studies should analyse this issue in a quan-

titative manner and hopefully with more than one host

country. This approach is necessary to develop

testable hypotheses that can further our knowledge of the

subject. Also, due to the large levels of corruption present

in Guatemala, the number of home countries with higher

corruption levels than the host country is limited.

Lastly, even though this study argues that those MNEs

headquartered in countries with high corruption levels

might not be negatively affected by corruption when

investing and operating abroad, it is important to note that

corruption is still a problem that affects them. As stated by

Shleifer and Vishny (1993), resources allocated to dealing

and complying with corruption could be more effectively

and efficiently deployed to more productive operations.

Firms from highly corrupt home countries should follow

the lead of their counterparts from less corrupt countries

and think proactively about this problem and how to avoid

it. If they do so, they would not only utilise their resources

more wisely, but they could also gain more goodwill from

customers that demand higher standards from MNEs.

Acknowledgements We would like to thank the editor and the two anonymous reviewers for their useful suggestions for improvement of

this manuscript. We would also like to thank Dr. Rick Woodward and

Dr. Mark Cordano for their helpful comments at different stages of

this project.

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Table 10 Summary of findings

Characteristics Previous knowledge of dealing with

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Perception of corruption Uncertainty created by

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Strategy to deal with

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