Abstract
This paper disentangles the effects of corruption on entry mode decision by carrying out an empirical analysis with rich, firm-level data on the activities of Swedish MNCs around the globe in manufacturing sectors from 1987 to 1998. A number of propositions emerge from a simple theoretical framework. The panorama of the results from the empirical part supports most of these propositions: Entry mode decision of an MNC is a complex one and there are many asymmetries involved when it comes to the impact of corruption on this decision. First, greenfield investments are always discouraged by higher levels of corruption. This is more so for firms with high levels of mobile skills. Second, M&As are encouraged by moderate levels of corruption. For firms with high levels of non-mobile skills this effect is stronger. However, when corruption levels are beyond a certain threshold, M&As are deterred as well. Third, firms with a wider network of foreign affiliates are more immune to the effects of corruption, whereas small, single affiliate firms are severely affected. These results confirm the findings of the recent literature and add to it by testing a number of extensions of this view.
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Notes
- 1.
Due to lack of data, the middle ground between wholly owned operations and no entry could not be included in the analysis in this paper.
- 2.
The model could be broadened in such a way that the firm’s choice extends to serving country H by exporting, which does not alter the principal insights. See Tekin-Koru (2012) for a model with exporting as an alternate way of serving the potential host country.
- 3.
The variable productions costs are concave in both mobile (μ) and immobile skills (ν) and convex in the level of corruption (ζ): \(\frac{\partial c} {\partial \mu _{p}} <\frac{\partial c} {\partial \mu _{h}} <0,\ \frac{\partial c} {\partial \nu _{h}} <\frac{\partial c} {\partial \nu _{p}} <0,\ \frac{\partial c} {\partial \zeta }> 0\) and \(\frac{\partial ^{2}c} {\partial \mu _{p}^{2}} = \frac{\partial ^{2}c} {\partial \mu _{h}^{2}} <0,\ \frac{\partial ^{2}c} {\partial \nu _{h}^{2}} = \frac{\partial ^{2}c} {\partial \nu _{p}^{2}} <0,\ \frac{\partial ^{2}c} {\partial \zeta ^{2}}> 0\) Moreover, the variable production costs are assumed to be submodular in their arguments.
- 4.
The cross derivatives of cost functions with respect to mobile skills and the level of corruption are as follows: \(\frac{\partial ^{2}c} {\partial \mu _{p}\partial \zeta }> 0,\ \frac{\partial ^{2}c} {\partial \mu _{h}\partial \zeta }> 0.\)
- 5.
The cross derivatives of cost functions with respect to non-mobile skills and the level of corruption are as follows: \(\frac{\partial ^{2}c} {\partial \nu _{h}\partial \zeta } <0,\ \frac{\partial ^{2}c} {\partial \nu _{p}\partial \zeta } <0.\)
- 6.
The official costs of entry are concave in immobile skills (ν) and convex in the level of corruption (ζ): \(\frac{\partial F^{b}} {\partial \nu _{h}} <\frac{\partial F^{b}} {\partial \nu _{p}} <0,\ \frac{\partial F^{b}} {\partial \zeta }> 0\) and \(\frac{\partial ^{2}F^{b}} {\partial \nu _{h}^{2}} = \frac{\partial ^{2}F^{b}} {\partial \nu _{p}^{2}}> 0,\ \frac{\partial ^{2}F^{b}} {\partial \zeta ^{2}}> 0.\) The cross derivatives \(\frac{\partial ^{2}F^{b}} {\partial \nu _{h}\partial \zeta }\) and \(\frac{\partial ^{2}F^{b}} {\partial \nu _{p}\partial \zeta }\) are negative by the same logic used in variable costs.
- 7.
This paper explores the profit maximization of firm p in the host country in isolation and does not take into account the multinational’s profit maximization neither in the parent country and nor in its broader worldwide network due to the much needed simplicity in this highly non-linear model.
- 8.
Parent level variables such as parent GDP, parent GDP per capita and parent education level are not included since Sweden is the only parent country and there is no cross-sectional variation in these variables. In essence, they act as time fixed effects and drop out of regressions. Common official language, colonial relationships and contiguous border variables do not work in the regressions due to little variation, as well.
- 9.
No standard error or significance indicators are given for marginal effects because Greene (2010) argues that the process of statistical testing about partial effects produces mostly uninformative and sometimes contradictory and even misleading results.
- 10.
Most of the countries that Swedish MNCs invest are developed countries which also have lower corruption levels than average country. Swedish MNCs invest in nearby developed countries because they have lots of potential M&A targets, and these countries just happen to have low levels of corruption cross-sectionally. Even though there are country-level regressors to control for level of development of a country in previous estimations, a more compelling experiment is to restrict the sample to these developed countries only to avoid potentially spurious results. The results are very similar to overall regressions.
- 11.
Other thresholds (2 or more and 5 or more) are used in the estimations and the results are similar.
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Appendix
Appendix
Aggregate profit to firms p and h from sales in the host country for entry mode s and quantity choice x i (s) can be expressed respectively as follows:
where X(s) = x p (s) + x h (s). When s = m, x h (s) = 0 and when s = n, x p (s) = 0. Maximizing (25) and (26) with respect to x p (s) and x h (s) in that order and solving for x p (s) and x h (s) in the first order conditions gives the equilibrium profit levels for each firm as
where
or
where i = ( p, h}.
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Tekin-Koru, A. (2017). Multinationals and Corruption: Business as Usual?. In: Christensen, B., Kowalczyk, C. (eds) Globalization. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-49502-5_7
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