Rent(s) Asunder:
Sectoral Rent Extraction & Bribery by
Multi-National Corporations
Dimitar Georguiev (UCSD)
Edmund Malesky (UCSD)
Nate Jensen (Washington University)
Motivation
• Ngo Vinh Long (2010): “Huge concentrations of
money, especially from foreign sources, have been
at the roots of many arbitrary decisions of the
Vietnamese state.”
• Vu Quang Viet (2010): “This has helped make
Vietnam more dynamic, capable of attracting
more foreign direct investment (FDI), opening up
the economy outwardly and generating much
more wealth, and thus offering more spoils for
abuse and bribery which have reached an
unprecedented scale under the current regime.”
The Puzzle
• The prevailing theory in the literature
contradicts the view of VN experts:
economic openness should reduce
corruption through two distinct but not
mutually exclusive channels.
 Mechanism – competition drives down monopoly
rents and therefore cost of bribe schedule
(Sandholtz and Gray 2003, Rose-Ackerman 1978,
1999)
 Mechanism – learning/diffusion of good
practices, lobbying, impact of FCPA ((Sandholtz
and Koetzle 2000, 40, Gerring and Thacker 2005,
Kwok and Tadesse 2006)
Alternative Views in the Literature
1. Corruption Deters Investment
 Directly
 Indirectly through Entry Strategy
2. Openness increases corruption
 Ades and di Tella also claim that corruption could worsen in high rent
sectors.
 Foreign firms use to solve a strategic disadvantage
3. Conditional relationship between openness and
corruption
 Quadratic effects, whereby corruption increases initially with FDI entry,
but decreases as international pressure is brought to bear.
 Impact of FDI on corruption depends on quality of local institutions,
increasing corruption in poorly governed areas
Measurement Problems in Corruption Data
Obscure Findings
4 Biases
1. Perception biases of respondents in how they
respond to Likert scales.
2. Anchoring bias in the way corruption and bribes
are understood.
3. Biases caused by the respondent’s confidence
that the information they reveal will not be used to
punish them.
4. Question wording which invites respondents to
answer about others’ experience with corruption
and not their own, leading to exaggeration of the
true bribe schedule.
Implications of Error for Inference
• Perceptions of corruption tend to be highly correlated with
economic development and institutional quality, but actual
corruption is not (Triesman 2007, Olken 2008).
• Strong possibility of “systematic, variable measurement error.”
Errors in the measurement of corruption are correlated with
factors that are attractive to foreign investors. Some are
measurable, many are not.
• Tell-tale signs. Institutions and wealth explain 90% of the
variation in corruptions, but have no correlation with actual
activity.
• Aggregate data predicts less reductions in corruption, but
firm-level data shows foreign investors more likely to admit
complicity.
Secondary Issue with Corruption Data
• Corruption manifests itself in a number of ways and
impacts individuals differently.
o Petty corruption – small bribes during regulatory procedures, inspections,
or policing.
o Grand corruption – bribes during procurement, kick-backs on government
contracts, abuse of government resources.
• General questions ask individuals to discuss issues of
corruption that they may have never experienced.
• General questions are not useful for understanding
the implications of particular policy choices.
Our Three Theoretical Refinements
1. Allow for possibility that foreign firms are complicit in bribing.
2. Focus on two particular form of economic – openness:
•
•
FDI vs Domestic Firms
The removal of administrative and regulatory restrictions
3. Acknowledge that not all gatekeepers have the same level
of extractive power, where restrictions create greater
opportunities for rents, we should expect higher level of
corruption.
Hypotheses
H1: The propensity of foreign firms to bribe increases with
economic rents.
H2: The removal of investment restrictions will:
a) reduce economic rents in a sector.
b) reduce the willingness of foreign firms to bribe.
Toward a Precise Method of Measuring
Corruption
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•
•
•
•
•
•
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Unmatched Count Technique (UCT, LIST) Question (Raghavarao
and Federer, 1979).
On one form, respondents are asked how many innocuous but
relatively infrequent activities they participated in over a clearly
defined time period and location.
The second group of respondents receives the same list of
innocuous items as well as an additional sensitive item.
Respondent only must recall the number of activities they
engaged in and must never admit to sensitive behavior.
Aggregation protects privacy and shields complicity.
The difference in means between the two forms provides the
proportion of respondents participating in the sensitive action.
The technique has been shown to provide the most accurate
and confidential assessments of sensitive activity in repeated
testing (Couts and Jann 2009).
Estimate (Probability of Bribery) = Mean (Form A) – Mean (Form B)
Laboratory Results For Sensitive Question
Techniques
Our UCT, Designed to Measure
Corruption During Business Entry
Sample and Method
• 7,300 Domestic, Private Enterprises AND 1,155
Foreign Direct Enterprises in Vietnam.
• Survey from Summer of 2010, as part of Vietnam
Provincial Competitiveness Index Survey.
• LIST questions embedded into survey.
• 35% response (high for business surveys), but
problematic – detailed comparison to underlying
population to make sure not biased (Appendix 2)
• 30% item non-response to LIST question. We use
multiple-imputation, but make sure results are
biased by procedure.
Table 3: Balance Test of Key Indicators of Control and Treatment Group
Domestic Private Entrprises (N = 7138)
Covariates
Labor Size Category (1 - 8)
Capital_Size Category (1 - 8)
Manufacturing (0 - 1)
Construction (0 - 1)
Services and Trade (0 - 1)
Agriculture (0 - 1)
Mining (0 - 1)
SOE History (0 - 1)
National Cities (0 - 1)
Industrial Zone (0 - 1)
1StopShop (0 - 1)
Telephones Per Capita
Control (N = 3512)
Mean
Std. Dev.
1.029
0.169
2.327
1.202
0.208
0.406
0.235
0.424
0.612
0.487
0.063
0.244
0.028
0.164
0.063
0.243
0.150
0.357
0.096
0.295
0.101
0.094
0.280
0.357
Treatment (N = 3626)
Mean
Std. Dev.
1.030
0.169
2.358
1.177
0.222
0.415
0.252
0.434
0.597
0.491
0.069
0.253
0.023
0.151
0.070
0.255
0.159
0.365
0.089
0.284
0.301
0.292
0.275
0.355
Difference in Means
P-Value
T-Score
0.937
-0.045
0.261
-1.124
0.172
-1.367
0.103
-1.632
0.193
1.303
0.379
-0.879
0.263
1.119
0.247
-1.158
0.336
-0.962
0.278
1.085
0.336
0.962
0.607
0.515
Foreign Invested Enterprises (N = 1124)
Covariates
Labor Size Category (1 - 8)
Capital_Size Category (1 - 8)
Manufacturing (0 - 1)
Construction (0 - 1)
Services and Trade (0 - 1)
Agriculture (0 - 1)
Mining (0 - 1)
SOE History (0 - 1)
National Cities (0 - 1)
Industrial Zone (0 - 1)
1StopShop (0 - 1)
Telephones Per Capita
Control (N = 296)
Mean
Std. Dev.
3.909
2.248
5.343
1.411
0.686
0.465
0.064
0.246
0.213
0.410
0.074
0.263
0.020
0.141
0.014
0.116
0.338
0.474
0.490
0.501
0.358
0.480
0.218
0.210
Treatment (N = 828)
Mean
Std. Dev.
3.681
2.119
5.316
1.494
0.729
0.445
0.037
0.190
0.209
0.407
0.051
0.220
0.014
0.120
0.007
0.085
0.385
0.487
0.481
0.500
0.377
0.485
0.262
0.317
Difference in Means
P-Value
T-Score
0.119
1.561
0.809
0.242
0.152
-1.433
0.055
1.917
0.888
0.141
0.133
1.504
0.497
0.679
0.325
0.985
0.148
-1.448
0.271
0.786
0.568
-0.571
0.027
-2.218
Propensity to Bribe During Registration
By Foreign and Domestic Firms
Ceiling/Floor Effects are Negligible.
Measuring Restrictions on FDI Entry
We take advantage of the fact that Vietnamese investment laws require special
approval from the Prime Minister’s Office for certain sectors (Group A).
• We code these sectors at the four-digit ISIC level, over time.
• Measure is nice, because it is less subject to simultaneity bias.
Excerpt of our coding scheme
Rents are Significantly Higher in
Protected Sectors
Do Restrictions Generate
Rents?
Multiple Regression using LIST Method
Conditional model of predicted sensitive activities
Results for H1
• Confirmation of H1: When all variables are held
constant at their mean, foreign firms attempting to
enter restricted sectors have a 31% predicted
probability of engaging in bribery, 14% higher than
their domestic competitors in restricted sectors and
19% more likely to bribe than foreign firms in nonrestricted sectors.
• Robust to: Year FE, Province FE, Truncation, Glynn
Piecewise Regression Non-Imputation.
• Holds for Type of investor: OECD v. Non-OECD; 100%
FDI v. JV; Industrial Zone v. External
o OECD investors in restricted sectors are less likely to bribe.
o Firms in Izs (in non-restricted sector are less likely to bribe).
Figure 4: Differences in Bribe Frequency
(By Foreign Firms, Restricted Sectors, and
WTO Entry)
35.7%
28.5%
19.0%
0
20 40 60
Restricted vs. Non-Restricted Foreign Firms
-40 -20
-7.0%
All Years
Pre-WTO
Pre-WTO (3y)
Post-WTO
22.9%
26.2%
14.0%
0
20 40 60
Foreign vs. Domestic Firms in Restricted Sectors
-40 -20
-3.8%
All Years
Pre-WTO
Pre-WTO (3y)
Post-WTO
Results for H2
• Mixed conclusions for Hypothesis 2. While opening
up to foreign competition does reduce the
propensity for MNCs to bribe, it compels their
domestic competitors within the same sectors to
increase their level of bribery.
o In years where a product faced restrictions, MNCs were
more likely to pay bribes. Foreign firms facing Group A
restrictions pay 12.5% more than firms in the same sector
that did not face such restrictions.
o Reducing the protections for domestic firms had the
opposite effect. The rate of bribery among domestic firms,
now suddenly subject to increased foreign competition,
actually increased by an average of 14.7%.
o Robust to truncation, piecewise, and non-imputation.
o Helps explain why the Vietnamese analysts, who primarily
cite domestic incidents, have observed an uptick.
Conclusions
• More refined analysis of globalization and
corruption.
o Openness can have differential effects on corruption,
even within the same country and the same
institutional setting.
o Foreign firms are not necessarily victims, they appear
willing to bribe if the rents justify the activity in both
entry and procurement.
o In lower-rent industries, there is no positive or negative
influence of “foreigness.”
o Removing restrictions and subjecting a country to
globalization can impact corruption indirectly, by
enhancing corruption in the domestic sectors.