Coping with corruption in foreign markets

Executive Summary Government corruption is a pervasive element of the international business environment and has damaging effects on governments, firms, and the broader society in which it takes place. Recently publicized scandals in Russia, China, Pakistan, Lesotho, South Africa, Costa Rica, Egypt, and elsewhere underscore the extent of corruption globally, especially in the developing world. Yet, the impact of government corruption on foreign investment has received limited attention. In this article, we examine how multinational firms respond to corruption when investing in foreign markets, especially developing countries. The article begins with a discussion of the direct and indirect costs of corruption to business and provides illustrations of corruption's impact on firms that invest in foreign markets. We employ a framework that incorporates two basic dimensions of government corruption--pervasiveness and arbitrariness. We then propose five broad strategies that multinationals should consider in responding to corruption and give examples of organizations that use these approaches. Corruption involves costs that firms investing abroad are likely to misjudge or ignore. A clear understanding of corruption's nature creates value for decision makers and allows for a strategic analysis of responses to corruption pressures.