CORRUPTION DISTANCE AND FOREIGN OWNERSHIP STRATEGIES

Abstract

The research on corruption in international business is still developing, and the limited studies on the effect of the difference in corruption levels between countries, or corruption distance, on foreign entry strategies have yielded mixed findings. The present study contributes to this literature by investigating the links between corruption distance, foreign ownership strategies, and the pervasiveness of petty corruption using theoretical frameworks from multiple theories of the firm. By incorporating available measures to develop a composite index for corruption distance, I account for various aspects of this complex phenomenon. Using Tobit regression models to analyze 3,341 unique entries in 64 host countries by 32 large US firms between 2001 and 2016, I find that, for a one-unit increase in home-host corruption distance, the parent firms’ ownership decreases by more than 12.5 percentage points. This relationship only holds, however, for the host markets that are more corrupt than the US. The pervasiveness of petty corruption in the host country is negatively related to equity ownership by almost 13 percentage points while not significantly moderating the corruption distance–foreign ownership relationship. These findings suggest that corruption distance should be analyzed independently of the overarching concept of institutional distance while taking into account the direction of comparative corruption. Overall, the findings suggest the need to develop national and multinational anti-corruption measures and promote international standards and practices to enhance integrity and accountability in international business. Amid the corruption risks in both their home countries and host countries, managers of multinational companies should develop effective entry strategies while also fostering ethical corporate culture and engagement in stakeholder management.