Master Thesis
‘What are the unethical foundations of a location
decision?’
Author: Job-Jan Meyer Student Number: 1950789 Address: Heymanslaan 7a 9714 GE Groningen The Netherlands Phone Number: +316 16155411 Email: jobmeyer@gmail.com University: University of Groningen Faculty: Faculty of Economics and Business Specialty: MSc International Business and Management
Abstract:
Despite the vast research by theorists on the field of strategic location decision and business ethics, little is known about unethical foundations that can have an influence the location decision of MNC’s. This paper will provide information which shows in how far the level of corruption of a country builds the base for unethical behavior to gain competitive advantage and influence the location decision process. Key motivational factors on firm-, home and host country level will be pointed out. The goal of this research paper is to give another insight on strategic management decisions and to make aware that corruption and bribing still are a daily routine in the international business world.
Acknowledges
Here, I would like to thank my supervisor Dr. Rajiv Kozhikode for helping and guiding me through this research.
Job-Jan Meyer
Contents
1. Introduction ... 1
2. Baseline ... 3
2.1 Location decision ... 3
2.2 Business Ethics and unethical Behavior ... 5
2.3 Corruption and Bribery ... 8
3. Factors ... 10
3.1 Firm-level factors ... 11
3.1.2 Resources ... 11
3.1.3 Stakeholders ... 11
3.1.3 Ethical Standards ... 12
3.2 Home Country factors ... 14
3.2.1 Media Exposure ... 14
3.2.2 Accountability ... 15
3.3 Host country factors ... 16
3.3.1 Working conditions ... 17 3.3.2 Local Opportunities ... 18 3.4 Intersecting Factors ... 20 3.4.1 Culture ... 20 3.4.2 Institutions ... 23 4. The model ... 25 5. Discussion/ Conclusion ... 27 5.1 Complete Model ... 32
5.2 Limitations and Future research ... 33
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1.
Introduction
The location decision for Multinational Corporations (MNCs) is a crucial factor in the success of an internationalization process. Until now location decision has been a major issue in existing international strategic management literature. Conducted research addresses the major issues of location attractiveness such as resources or infrastructure as emphasized by Weber (1909); Christaller (1933/1966); Hotelling (1929); Lösch (1954). However, few studies have been conducted about the location decision when it comes to the field of unethical behavior and their influence on the location decision of the internationalization strategies.
The focus in this research is on the motivations to make use of unethical behavior that is expressed by MNCs and which might influence their location decision to gain competitive
2 | P a g e Consequently the following research question is formulated:
What are the unethical foundations of a location decision?
This research contains different sections that have the purpose to lead to the result of a full description of what the research is anticipated to investigate, the motivation to make use of unethical behavior of a Multinational Corporation (MNC) on the strategic location decision of the firm. In the first part, the theoretical backgrounds are displayed to explain the importance of a location decision for MNCs and the role that business ethics play in this decision making
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2.
Baseline
This chapter reviews the literature that is used as a background for the research. This includes the theories of location decision. Furthermore, business ethics and unethical behavior are explained to the reader, which consequently leads to a description of the unethical behavior that is used in form of corruption and bribery.
2.1 Location decision
In this research the location decision and entry modes are the dependent variable in the later displayed model. Therefore, the next section provides the reader with sufficient knowledge about this topic and also introduces several key motivations for internationalization which are later presented in more detail.
Location decision has been a major issue in international strategic management. The location decision for MNCs is of crucial importance in the success of an internationalization process. In this field a lot of research has been conducted about key drivers of location attractiveness such as resources or infrastructure as mentioned by (Weber, 1909; Christaller 1933/1966; Hotelling 1929; Lösch, 1954). These motives are also underlined by Dunning (1980) who argues that there is now a consensus of opinion that the propensity of an enterprise to engage in international production that, financed by foreign direct investment rests on three main determinants: first, the extent to which it possesses, or can acquire, on more favorable terms, assets which its competitors, or potential competitors, do not possess; second, whether it is in its interest to sell or lease these assets to other firms, or make use of, internalize, them itself; and third, how far it is profitable to exploit these assets in conjunction with the indigenous resources of foreign countries rather than those of the home country.
4 | P a g e Another recent stream in literature also adds other factors that traditional economic frameworks do not take into account and might influence the location decision of MNC —for instance, quality of life indicators (e.g., Love & Crompton, 1999; Salvesen & Renski, 2003) and environmental regulations (e.g., Becker & Henderson, 2000; Brunnermeier & Levinson, 2004) (McDonough Kimelberg, 2010). These additional factors reflect changes in the environments of the MNCs and the globalization that took place. It is not even the global market place that MNC have to deal with but also an isomorphism of peoples buying decisions and perceptions of global firms.
However, in the literature, the view that only resources and or regulations can be seen as a motive for a location decision is not shared by all scholars; Wymbs (2005) adds the factor of heterogeneity of MNCs. He bases his argumentation on research done by Kravis and Lipsey, (1982); Friedman et al., (1996); Shaver & Flyer, (2000); Belderbos & Carree, (2002); Chung and Alcacer, (2002). According to Wymb (2001), these studies show that the location choices of MNEs are not determined only by the advantages of different locations, as assumed in traditional FDI theory (Dunning, 1993). Instead, they introduce a notion of location advantages that vary across firms, in line with their idiosyncratic characteristics. This argumentation shows that MNCs in fact not always choose their location of operation on plain reasons like available resources but also imitate the behavior of other MNCs. This is of particular interest for this research because it could help to reason why MNCs in certain countries act unethically, even though they would rather not. They just need to adapt to the national rules of the game and if other MNCs adopt unethical behavior an ethical MNC would be confronted with competitive disadvantages.
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2.2 Business Ethics and unethical Behavior
As mentioned in the section before, this research builds up to develop a model which will help to understand the different relationships between different variables. This section provides the knowledge for the independent variable of the research, business ethics, unethical behavior and corruption as a way of executing unethical behavior.
In an era of globalization when increasing numbers of firms are engaged in international business, international bribery is an ethical issue of much concern. Consequently, it is useful to begin this section with a definition of ethics. The Macquarie Dictionary (1981: 614) defines ‘ethical’ as ‘pertaining to or dealing with morals or the principles of morality; pertaining to right and wrong in conduct; in accordance with the rules or standards for right conduct or practice’. Ethics are standards of conduct that guide decisions and actions, based on duties derived from core values, fundamental beliefs or principles, defining what we think is right, good, fair and just, and demonstrating behaviors that tell people how to act in ways that meet the standard our values set for us (Ethics Resource Center, 2005). To narrow this broad definition a bit more to the point, a definition of business ethics is added; according to De George (1989: 337) business ethics is a ‘systematic study of business from an ethical point of view’. Ethical behavior is concerned with ‘ought’ and ‘ought not’ and implies there are standards which may extend beyond what is required by law or is commercially profitable (Minkes, 1999). Another approach of defining business ethics is stated by Cremer, Mayer and Schminke who say that business ethics generally deal with evaluating whether practices exercised by employees, leaders and organizations as a whole can be considered morally acceptable (Eerrell, F'raedrich, Ferrell 2008; Cremer, Mayer, Schminke 2010). From the approach of Cremer, Mayer and Schminke we can see, that they break the ethics down into three parts, the employees, the leaders and the
organizations. That shows that the level of ethics can differ within one organization.
Organizations need to be aware of the fact, that their kind of leadership and the communication of their ethics play an important role to their total functionality. If the organizations themselves are involved in morally unacceptable practices, the leaders and employees are more likely to follow this role model. In another definition of business ethics, Heath also adds an criminological variable: one of the peculiar features of business ethics, as compared to other domains of applied
6 | P a g e 1989, pp. 128–129; Coleman, 1989, pp. 6–8; Leonard & Weber, 1970; Sutherland, 1968, p. 59; Heath 2008). In this approach towards business ethics defined by Heath (2008) we can detect, that the author automatically relates the topic with crime. According to that, business ethics in some cases will lead to more crime. On the one hand one can agree with Heath, because of the involvement in human affairs. As we saw in the definition by Cremer et al. (2010) business ethics start from every employee itself to the whole organization. In the literature it is also added that it is especially to the top managers to act as models for all the employees in the firm, if
strong ethical leadership is not demonstrated at the top, those below will not grasp its
importance to business, thus diluting moral culture (Reeves- Ellington, 1998). The objective thus must be to form an ethical congruency in which the leaders’ interests and the employee’s
interests are aligned in an ethical form of conducting business (Navran, 1994). Krikorian (1994) notes that five actions are required to encourage adherence to ethical conduct and shared value systems within business: 1.) integrating ethics into all levels and functions of operations requiring strong support from board and top management, 2.) having open and transparent communications, 3.) treating all employees as trusted and valuable individuals with opportunities to reach their full potential, 4.) placing utmost emphasis on serving the customer well and 5.) ensuring all activities follow a written code of conduct fitting as tightly at the top as the bottom of the organization. Researchers have demonstrated that organizational factors, such as codes of conduct (Cressey & Moore, 1983; Laczniak & Inderrieden, 1987; Mathews, 1987; McCabe & Trevino, 1992; McCabe, Trevino, & Butterfield, 1996), can significantly decrease the prevalence of unethical behavior in organizational contexts. In this setting, codes of conduct can be defined as written, distinct, and formal documents which consist of moral standards used to guide employee and/ or corporate behavior.
7 | P a g e In this thesis the focus will be in how far unethical behavior in the international business world, like corruption or bribery, influences this location decision. To understand why the avoidance of corruption is an ethical issue for business one needs to understand why corruption often appears to be a value-maximizing strategy. Firms pay bribes to get favored treatment on contracts, concessions, and privatization deals. The benefits may consist of the actual award of the contract or of inside information that makes a bid more likely to succeed. The risks of both legal sanctions and reputational damage are judged low enough to justify payoffs.
Following Jones’ definition of ethical decisions (Jones, 1991), unethical behavior can be defined as behavior that has a harmful effect upon others and is "either illegal or morally
unacceptable to the larger community". After several scandals like the Enron failure, the Siemens bribery scandal and many more, the attention towards unethical behavior has increased. Tanzi (1998) argues that the current interest in corruption probably reflects an increase in the scope of the phenomenon over the years and not just a greater awareness of an age-old problem. The ease to gain information worldwide and the speed with which this information is published through mass-media leads to an increasing knowledge and selective perception by a broad audience. As a matter of fact, one can detect, that unethical behavior can be threatening the firm’s success, so the question arises: Why do firms act in unethical ways? The main driver for unethical behavior is profit maximization. The McKinny and Moore (2008) article also addresses this motivation and argues that corruption and bribery are not helpful for the countries in which they take place because they hinder the development of the local economy. This article clearly shows that even though bribery is illegal and accordingly should not be tolerated, it is often used for one single purpose; gaining a competitive advantage on the firm level and hence maximize profits. This view is also supported by Rose-Ackerman (2002) who argues that firms pay bribes to get favored treatment on contracts, concessions, and privatization deals. The benefits may consist of the actual award of the contract or of inside information that makes a bid more likely to succeed. Firms also pay to affect the terms of contracts and of the future regulatory environment. Even when a firm’s managers believe that it has a strong chance of winning an honest competition, they may bribe if that is the accepted method of doing business in spite of laws to the contrary.
8 | P a g e organization, but are based on the negotiations and ideas of the employees that deal with the certain internationalization process. It should also be noted that companies that are using
unethical and illegal techniques always run the risk of being punished for it. However, nowadays the risk to engage in unethical behavior that the companies experience is increasing due to two major factors. Firstly, the penalty fees charged by government and regulating institutions are increasing and secondly, the role corporate image plays is getting more and more important. Customer reactions to firms involved in corruption can be severely harming to a company, because they may decide to purchase products or services of competitors instead, which would have an effect on the profits of the company. Another important risk firms face is the uncertainty about the benefits they actually gain by techniques such as bribery because they can have an adverse effect on the firm if the unethical actions are revealed as mentioned by Schwaiger (2004).
2.3 Corruption and Bribery
Corruption and with it bribery is one of the most famous ways to express unethical behavior by MNCs therefore the next section provides the reader with an introduction to the topic.
The degree of attention now paid to corruption leads naturally to the question of why. Why so much attention now? Is it because there is more corruption than in the past? Or is it because more attention is being paid to a phenomenon that had always existed but had been largely, though not completely, ignored? The answer is not obvious, and there are no reliable statistics that would make possible a definitive answer (Tanzi 1998).
From this quote taken from an article from Tanzi (1998), one can detect, that corruption even though it may be in the focus of current literature, is an age old problem that does not exist since globalization but already since the beginning of trade. So to give this part a logical
9 | P a g e by the government. Sometimes, the abuse of public power is not necessarily for one’s private benefit but for the benefit of one’s party, class, tribe, friends, family, and so on. In fact, in many countries some proceeds of corruption go to finance the activities of the political parties (Tanzi 1998). Even though corruption seems to be a problem that actually exists since trade developed, the focus in this research will be on the corruption that is taking place since the phenomenon of globalization.
Globalization leads to cross-border business transactions between societies with very different norms and regulations regarding bribery. Bribery in international business transactions can be seen as a function of not only the demand for such bribes in different countries, but the supply, or willingness to provide bribes by multinational firms and their representatives (Baughn et al. 2010). In their article Baughn et al.(2010) bring up the theory of corruption as a demand and supply function in which the demand side represents the recipient of the bribe, with the payer of the bribe representing the supply side (Beets, 2005; Hamra, 2000; Sung, 2005; Vogl, 1998). In international transactions, those seeking to justify paying bribes often attribute their actions to local foreign cultures and conditions, thereby emphasizing demand (Getz and
Volkema, 2001). From a demand-side perspective, the critical economic conditions, institutional characteristics, and cultural values that influence transnational bribery would be seen as those in the country in which the bribe is taken, rather than those of the supplier of the bribe (Baughn et al. 2010).
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3.
Factors
After explaining the background for the dependent and independent variables in the former chapter, this section displays the key motivations that relate the level of corruptness and the location decision. These factors are classified into three different levels: The firm-level, the home-country level and the host-country level. These three levels have a significant impact on the location choice of an MNC in their internationalization process (Table 1). Firm- level factors can either augment or reduce a company’s willingness to invest in another country.
Consequently, hypotheses are proposed that relate the firm- level factors with the level of corruptness and the location choice. In a similar manner, home- and host country factors affect the location choices either enhance or reduce the selection of location that might be interesting for MNC’s and their internationalization processes. Consequently, for this part several
propostions are formulated as well.
TABLE 1
Effects of the level of corruption on the location choice of an MNC
Firm- level factors Effect
Resources Positive
Stakeholders Negative
Ethical Standards Negative
Home Country factors
Media Exposure Negative
Accountability Negative
Host Country factors
Working conditions Negative
Local opportunities Positive
Intersecting factors
Culture Negative
11 | P a g e 3.1 Firm-level factors
Firm- level factors can either increase or decrease a firm’s choice for a distinct location. This section begins with three distinct firm-level factors that can be seen as moderating factors between the level of corruption and the location decision of an MNC. The here displayed factors are: resources, stakeholders and ethical standards. These three are chosen because of their relation towards corruption and their influence on the location decision.
3.1.2 Resources
As already mentioned in the baseline section, resources are a main motivation for MNCs to choose their location. These resources can be raw materials that are needed for a product but can also be found in the form of cheap labor, new technologies or skills that cannot be found in the home country. Recent studies (Lecraw, 1993; Wesson, 1994; Chen & Chen, 1998; Dunning, 1995; Makino & Delios, 1996; Kumar, 1998; van Hoesel, 1999; Frost, 2001) suggested that firms would engage in FDI not only to transfer their resources to a host country, but also to learn, or gain access to the necessary strategic assets available in the host country.
Such an access to new or scarce resources can be seen as a competitive advantage for the MNC on the one hand. On the other, competitors are likely to act in homogenous ways, which means that they would allocate their activities in the same localities as other MNCs would do. This enhances the competition among MNCs in the host countries and with that the likelihood to engage in unethical behavior.
Proposition 1: Scarce resources in a corruptive country, positively affect the location choice of a MNC and increase the possibility to engage in unethical behavior.
3.1.3 Stakeholders
Stakeholders are surroundings of a firm that have an influence on the company. As Freeman states, "the stakeholder approach is about groups and individuals who can affect the organization, and is about managerial behavior taken in response to those groups and
12 | P a g e secondary, direct or indirect, generic versus specific, legitimate versus derivative, strategic and moral, core, strategic and environmental stakeholders, etc.
In this section though, the actual groups of stakeholders do not really matter that much. Here it is more of concern in how far the stakeholders can have an influence on the location choice with regard to the level of corruptness. It is helpful to start this section with a definition of the
stakeholders. In an early statement Jones (1980: 59-60) defined corporate social responsibility as "the notion that corporations have an obligation to constituent groups in society other than stockholders and beyond that prescribed by law or union contract, indicating that a stake may go beyond mere ownership". Freeman's now-classic definition is this: "A stakeholder in an
organization is, by definition, any group or individual who can affect or is affected by the achievement of the organization's objectives" (1984: 46). For this research it is interesting to see whether stakeholders have an effect on the location choice of MNCs. In the literature it is stated that a stakeholder refers to any individual or group that maintains a stake in an organization in the way that a shareholder possesses shares. This means that the stakeholders of a firm play an influential role in the decision making process of a firm. That also means that the decision that a company makes also has a revers effect on them. If a company is planning to invest in a country with a high level of corruption, and where it is obvious that the company has to engage in unethical behavior, it is to the ethical standards of the stakeholders to use their power to either approve or reject the decision.
Noreen (1988) argued that efficient contracting in agency relationships is best achieved through shared norms and ethical rules that reduce opportunism. His argument is utilitarian in nature; the economy, and hence society, will benefit from ethics in economic relationships. Frank (1988) took the argument a step further by concluding that not only is ethics good for us collectively, but it is also good the individual.
Proposition 2: The more ethical stakeholders behave, the lower the chances that a MNC invests in highly corrupt countries.
3.1.3 Ethical Standards
On the firm level one can find ethical standards as a factor that describes the relationship between the level of corruptness and the location choice. As to this date, most ethical standards or written down codes of conduct are established within the firms themselves on a voluntary basis. In a paper published by the OECD they are defined as commitments voluntarily made by companies, associations or other
13 | P a g e governance (OECD, 1997). In another paper written by Schwartz (2004) it is defined as follows: A code of ethics is a written, distinct, and formal document which consists of moral standards used to guide employee and/ or corporate behavior. Taken these two definitions one can state that the codes of conduct of a company are guidelines for the company itself but also for all individual employees. That means that these codes need be shared and lived by all members of the company so that they actually can be seen as followed. The measurement of these practices though is hard in day-to-day business life. As can be seen from the definition of business ethics made by Cremer et al. (2010) in which they break down the business ethics and moral standards into three sections, the firm itself, the management and the employees. This shows that a company has to deal with different individuals that will at some time also work for their personal benefits is hard to control. The company itself needs to act according to the codes of conduct its top management team has to follow them and this makes it easier for the employee to believe in the shared values and norms.
The literature on effectiveness of codes of ethics in influencing ethical attitudes and behavior is somewhat mixed. Some studies have found evidence that codes of ethics have a positive influence (e.g. International Bribery 105 Hegarty & Sims, 1979; Ferrell & Skinner, 1988; Singhapakdi & Vitell, 1990; Pierce & Henry, 1996; Adams et al., 2001; Somers, 2001; Valentine & Barnett, 2003; Schwartz, 2004). Others have found it difficult to detect a positive effect (e.g. Ford et al., 1982; Chonko & Hunt, 1985; Akaah & Riordan, 1989; Callan, 1992; Clark & Leonard, 1998; Farrell et al., 2002). Recent research seems to indicate that the
effectiveness may depend on such a code being ‘‘integrated into a comprehensive philosophy of business ethics’’ (Valentine & Johnson, 2005; see also, Schwartz, 2004). Other researchers have demonstrated that organizational factors, such as reward systems (e.g., Hegarty & Sims, 1978), norms and culture (e.g., Trevino, McCabe, & Butterfield, in press), and codes of conduct (Cressey & Moore, 1983; Laczniak & Inderrieden, 1987; Mathews, 1987; McCabe & Trevino, 1992; McCabe, Trevino, & Butterfield, 1996), can significantly decrease the prevalence of unethical behavior in organizational contexts.
14 | P a g e 3.2 Home Country factors
Home country factors have also been identified to have an interrelationship between a countries level of corruptness and the location choice. If a company comes from a country where corruption is a common business practice, it is more likely for them to engage in unethical practices in a host country. In this section two factors have been identified that needed a more in-depth explanation, which are the accountability of a company and the media exposure of the home country. Additionally, the institutions and the culture of the home country are also factors that need to be taken into account. These two factors though are also important in the host country section and therefore can be seen as intersecting factors that are explained in an own section.
3.2.1 Media Exposure
Given the fact that most MNCs come from developed countries one could assume that the transparency in the media in their home country is quite high. In the literature evidence can be found that wealthier countries are characterized by higher levels of education, literacy, and growth of mass media, which have been found to be associated with less corruption. The modern mass media are thought by some to have an immense effect on modern government and politics, but the nature of these effects are controversial. Some claim that their effects on democracy are malign and have coined the term 'videomalaise' to encapsulate the argument. It is claimed that market competition and the search for bigger audiences and circulation figures force the media to dwell on dramatic news, especially bad news about crime and conflict, death and disaster,
political incompetence and corruption, sex and scandal, anything else that is sensational. If there is little conflict, the media will exaggerate what exists, or try to create it (Newton, 1999). To MNCs these mass media, the transparency and freedom of press can be harmful. A good
15 | P a g e The actual case and the events that took place with NIKE in South East Asia were documented by a journalist who published the whole story in the mass media. The attention that this case developed was immense and people started to reconsider their buying behavior. From this case we can detect that the mass media is an instrument that can be very harmful for companies when they decide to engage in unethical practices. Even though these practices are common and followed by all competitors.
Proposition 4: The higher the attention of mass media, the less likely are MNCs to invest in countries with a high level of corruption.
3.2.2 Accountability
In this thesis accountability is identified as a factor that can have an influence on the relation between the level of corruptness and the location choice. It is important to know who is accountable for actions taken by a company and in how far these actions, if unethical or illegal, are punished by the home country. Accountability is where finance and ethics meet (Munro, 1998). It allows striking a balance between the greedy self-interested corporation and the socially sensitive firm-citizen. The ethos of accountability also extends beyond markets, to universities, state agencies, and international aid. It also implies new links between organizations in different domains (Marcus, 1998). Yet, while the idea of accountability may render business more
credible, it is not always clear to whom individuals and organizations are to be accountable, nor what the wider webs of values in which accountability is embedded look like (Garsten, 2003). Accountability, as the word itself suggests, is about the need to give an account of one's actions. In an organizational context, the primary duty of obligation is to provide such an account to one's superiors in the hierarchical chain of bureaucratic command. Hummel (1994) captures the
essence of bureaucratic accountability in pointing out that managerial control is based on the attempt to render all work 'visible', through reporting systems and procedures (Lederman et al. 2004). From this extract we can detect that accountability is about disclosure and transparency of a firm. If a firm is engaged in unethical practices it will be held as a secret and thus makes it hard to be controlled. Being accountable means to be answerable, thus to provide answers or report to the institutions that need to informed. If the home country has strong restrictions on the
16 | P a g e company. It means that a country which is perceived to be corrupt would have a less chance to profit from FDI in their country compared to countries in which the norms and standards for accountability are clear stated.
Proposition 5: Transparent accountability in the home country hinders a MNC to exploit the high corruption in the host country.
3.3 Host country factors
In an increasingly competitive world, the drive to secure international capital has become intense. Numerous examples of local and even national authorities, giving substantial incentives to MNCs in return for setting up plants in their areas of jurisdiction are well documented. Many less developed countries (LDCs) have elaborated incentive schemes to secure foreign direct investment by MNCs. In this environment it is quite important to identify the factors which actually underlie location choice by MNCs. Many possible factors have been proposed in qualitative studies. Examples of such work include de Meza (1979), Caves (1982), Eaton and Grossman (1986), Dunning (1988), Collie (1992) and Mudambi (1993).
17 | P a g e rate of income growth for those at the lower end of the income scale, and increases income inequality (Gupta et al., 1998 as cited in McKinney, Moore, 2007). Corruption has been found to adversely affect public spending on both education and health (Mauro, 1998), and to hinder educational attainment and longevity (Akcay, 2006).
The article gives a good insight how corruption and bribery affect the local economy. It does also show that the MNCs have an influence on the local economic and demographic situation in the countries they invest in. A finding in the article of Ho (2009) is that
underdevelopment of institutions expedites illegal political actions, but frustrates legal political action. This finding indicates that undeveloped countries are more likely to allow bribing and corruption than developed countries. These findings also are conform to the tables that are presented by Transparency International and work from Tanzi (1998) who finds that the problem of corruption is way more to be found in LDCs than in developed countries, he points out that economic development reduces the level of corruption of a country. However, at similar levels of development, some countries are perceived to have more corruption than others. Which again shows the uncertainty which can be found in the research area of corruption and bribery, there is no such things as a pattern that can be followed. To prove these facts in this research, location decisions of MNCs which were engaged in scandals will be compared with the country profiles that are published by Transparency International (TI bribe payers Index, 2008). The assumption is that the these firms that showed unethical behavior are investing in countries with weak regulations on corruption and bribery, which would help to establish a relationship between unethical behavior and the location decision. As just mentioned, regulation thus affects the behavior of firms to act unethically.
3.3.1 Working conditions
18 | P a g e FDI is often seen as a driver for economic development as it may bring capital,
technology, management know-how, and jobs in receiving countries and access to new markets for foreign investors. Policy-makers have, therefore, tended to emphasize the benefits that FDI can bring to host economies, particularly in developing countries. Accordingly, many
governments have developed policies to encourage inward FDI.
While FDI and MNCs are often perceived to be beneficial for local development, they have also aroused much controversy and social concerns. For example, MNCs have often been accused of taking unfair advantage of low wages and weak labor standards in developing countries. MNCs also have been accused of violating human and labor rights in countries where governments fail to enforce such rights effectively. Further evidence presented in OECD (2008a) suggests that FDI – through both greenfield investment and cross-border M&As – may have positive spillover effects on the wages and non-wage working conditions of employees in domestic firms, but these indirect effects tend to be considerably weaker than the direct effects on employees in the foreign affiliates of MNEs (Arnal & Hijzen 2008). But even though evidence is present that FDI is helpful to improve working conditions it needs to be taken into account that the labor practices still are embedded in their national standards. That means that even though the working conditions may improve to the better, it does not mean that they are adapted to the standards of the MNC. The fact that labor practices are embedded in a social context also implies that unethical behavior, if it is a standard in the host country, must be considered by the MNC.
Proposition 6: The more the working conditions in the host country are surrounded by corruption, the higher the possibility that MNC exploit these conditions.
3.3.2 Local Opportunities
In the literature a broad field of research has been conducted about the motivations of MNCs to engage in international markets. In this research the local opportunities, hence the opportunity to generate economic rents through the exploitation of some firm specific assets, have been
19 | P a g e Before describing this taxonomy, it should be pointed out that it is built upon the OLI paradigm (Dunning, 1977), that explains why (Ownership advantage) and how (Internalization advantage) a firm decides to become a multinational and where (Location advantage) it is more likely to invest (Franco et al. 2008).
The taxonomy is made up of three categories:
Resource seeking: in this category the main aim of the MNEs is that of acquiring particular types of resources that they are not available at home, like natural resources or raw materials, or that are available at a lower cost, such as unskilled labor that is offered at a cheaper price with respect to the home country.
Market seeking: in this case MNEs invest in a foreign country to exploit the possibilities granted by markets of greater dimensions. Various reasons, besides that of searching and
exploiting new markets, lead to this choice by the MNEs: to follow suppliers or customers that have built foreign production facilities, to adapt goods to local needs or tastes and to save the cost of serving a market from distance. In recent times it is becoming important also to have a physical presence on the market to discourage potential competitors from occupying that market.
These two types of motivations are the most cited and debated in the relevant literature; in particular with regard to international trade models that try to formalize the OLI paradigm, they are defined respectively as vertical and horizontal FDI.
The third taxonomy is called efficiency seeking which occurs especially in two occasions: in the first case firms “take advantage of differences in the availability and costs of traditional factor endowments in different countries”, while in the second one they “take
advantage of the economies of scale and scope and of differences in consumer tastes and supply capabilities” (Dunning, 1993, p.60)
20 | P a g e From these extracts we can state that local opportunities can be found in the resources a host country possesses, the size of the market that it has and the possibility to produce in
economies of scale and scope. The question that arises in the context of this thesis is, in how far does the level of corruptness hinder such an investment in a country? Corruption could
conceivably have a positive effect on economic growth. The proponents of "efficient corruption" claim that bribery may allow firms to get things done in an economy plagued by bureaucratic hold-ups and bad, rigid laws (Leff, 1964; Huntington, 1968). A system built on bribery for allocating licenses and government contracts may lead to an outcome in which the most efficient firms will be able to afford to pay the highest bribes (Lui, 1985). However, these arguments typically take the distortions circumvented by the corrupt actions as given. In most cases, distortions and corruption are caused by, or are symptoms of, the same set of underlying factors. As Myrdal (1968) pointed out, corrupt officials may not circumvent distortions, but instead actually cause greater administrative delays to attract more bribes (Svensson 2005). Most of the theoretical research as well as case studies and micro evidence suggest that corruption severely hinders development. However, to the extent we can measure corruption in a cross-country setting, it does not affect growth.
Proposition 7: A high amount of local opportunities in a corrupt country, positively affects the location choice of the MNC.
3.4 Intersecting Factors
3.4.1 Culture
Kluckhorn, Hofstede, Turner and Trompenaars, and many other management theorists have shown the importance of cultural differences to business—but the further issue of the ethical implications of many of these differences remains unexplored therefore it is of importance to use the cultural factor as a moderator.
21 | P a g e cultures. For international business, culture is important because it affects individual and
organizational behavior. In the study of corruption, cultural values are important because they influence decisions about whether to engage in corrupt transactions. Although we do not wish to perpetuate the myth that corruption is merely a matter of culture, it is true that in some cultures there are social norms that may lead individuals to place less emphasis on avoiding corruption (Tanzi, 1994).
Culture has been variably defined in economics. According to the most restrictive
definition culture is a coordination device, for example a set of social norms and beliefs that lead a society to a specific equilibrium when multiple equilibria exist (Greif, 1994). More
comprehensive definitions encompass “the values, attitudes, beliefs, orientations and underlying assumptions prevalent among people in a society” (Huntington, 2000).
According to Husted (1999), but also Getz & Volkema (2001) it is useful to consider the work-related dimensions introduced by Hofstede (1997) to find an explanation between culture and unethical behavior. The dimensions used in this research are power distance, uncertainty avoidance, individualism versus collectivism, and masculinity versus femininity.
Power Distance
Power distance is the extent to which rigid social hierarchies are preferred and maintained in a culture. In high power-distance cultures, people believe that there are appropriate and
unbridgeable separations between socioeconomic classes. That means that to some certain extent public officials would use their position to change their individual situation in a society and by this would also consider taking bribes to succeed in their path. Cohen, Pant and Sharp (1996) argue that people from a high power-distance culture would be more likely to view a
questionable business practice ethical than people from a low power-distance culture.
22 | P a g e
Uncertainty avoidance
Hofstede (1997, p. 113) defines uncertainty avoidance as "the extent to which members of a culture feel threatened by uncertainty or unknown situations." It reflects certain intolerance for ambiguity within a given culture. In this context, unethical behavior could be seen as a
mechanism that can reduce uncertainty. This assumption can be supported by Rashid (1981) who argues that bribery reduces uncertainty in the contracting of utility services in egalitarian third-world countries. In conclusion, that would mean that individuals of countries with high
uncertainty avoidance would rather find their channels and make use of unethical practices than follow the norms and rules.
Individualism/ Collectivism
Individualism is the extent to which a culture values the individual over the social group. In individualist cultures people tend to set their objectives based on what is good for them, whereas collectivist cultures emphasize group objectives (Getz & Volkema 2001). In the literature it is stated that several authors have seen a relationship between collectivism and corruption. Hooper (1995) links the tendency to favor one's ingroup to corruption in Spain. Banfield (1958) saw a connection between the "amoral familism" (favoritism for family members) of a small village in southern Italy and the tendency of its public office holders to accept bribes. Furthermore, it is stated that in collectivist cultures there may be a network of friends and family and an orientation toward creating lasting relationships that would facilitate abnormal or illegal Transactions. From this one could conclude that in more collectivistic cultures the acceptance and execution of unethical is more spread than in individualistic cultures.
Masculinity/Femininity
Masculinity is a dimension that refers, among other things, to a focus on "material success" as opposed to a concern with the "quality of life" (Hofstede, 1997, p. 82). Getz & Volkesma (2001) argue that in masculine cultures, people may be comfortable pursuing their goals through
23 | P a g e masculine cultures, the acceptance of unethical behavior is greater because of the success that it can deliver to the individual, so it can be stated that the higher the masculinity index of a culture is, the more likely it is that corruption thrives in that country.
From these aspects shown in this part of the thesis one can conclude that culture is a factor that has an effect on the likelihood of corrupt actions in a country and thus needs to be added to this research.
Proposition 8: The higher the cultural differences in the perception of corruption, the lower the possibility that a MNC will invest in that country.
3.4.2 Institutions
The quality of institutions is likely an important determinant of FDI activity, particularly for less-developed countries for a variety of reasons. First, poor legal protection of assets
increases the chance of expropriation of a firms assets making investment less likely. Poor quality of institutions necessary for well-functioning markets (and/or corruption) increases the cost of doing business and, thus, should also diminish FDI activity (Blonigen 2005).
In their article “International bribery: does a written code of ethics make a difference in perceptions of business professionals”, McKinney and Moore (2007) elaborate on the field of bribery and the influence on international business. “In an era of globalization when increasing numbers of firms are engaged in international business, international bribery is an ethical issue of much concern.” Baughn (2009) argues that bribery is a main facet of corruption. A public
official, in the performance of official duties, is given something of value that influences a decision or policy favorably to the one offering the bribe. When payment of a bribe is initiated on the demand side by corrupt government officials it is referred to as extortion. While this is most commonly the reason for payment of a bribe, it is possible for the bribe to be initiated on the supply side by a firm or company offering an unsolicited payment in order to gain favor, most often a government contract (McKinney & Moore, 2007).
24 | P a g e schemas, norms, and regulations that enable and constrain the behavior of social actors and make social life predictable and meaningful (North, 1990; Powell & DiMaggio, 1991; Scott, 2001).
In research of the last decades, most attention has been paid to the environments in which corruption thrives, the incentives of politicians or public officials to demand bribes, and the welfare consequences thereof (Soreide, 2009). In another article, written by Oh (2009), it is said that under institutional environments in which private property rights are not well protected, the rules of the game are unstable, and legal enforcement systems are not promising, firms are more inclined to embrace bribing rather than lobbying as a political investment. Where corruption is highly prevalent, the risk of being caught and punished is significantly decreased and bribing becomes more attractive (Murphy, Shleifer, & Vishny, 1993; Rose-Ackerman, 1975; Mauro, 1998). In such a situation, while bribery is illegal, it has been considered to be an effective business operation because it provides immediate benefits to the recipient and often conveys benefits to the payee (Boddewyn, 1988; Lenway, Morck & Yeung, 1996; Ring, Lenway & Govekar, 1990, Oh, 2009). It can be seen here that bribery even though it is illegal, delivers a faster result in some countries than the legal approach would do. It is here to the ethics of the MNC to not take advantage of that. As mentioned earlier, bribery may lead to a faster result in establishing a successful outpost of business activities, but it is not good for the country in which they take place in the long run because it effects the environment of the host country.
25 | P a g e
Proposition 9: Corrupt institutions have a negative effect on the location choice of an ethical MNC.
4.
The model
In the previous chapters I discussed the classic strategic location processes that are executed by MNCs and the concepts of business ethics, corruption and bribery. Determinants that relate these concepts were established and sub-divided into firm-level, home country and host country factors. These factors were explained and defined which finally led to the propositions that try to relate the level of a countries corruption to the location decision choice of MNCs. In this chapter I discuss the conceptual framework’s interrelationship factors that are significantly influencing the strategic location decision of MNCs. The goal of this research is not to deliver any empirical results, although in a later section I discuss in how far the results delivered here can help further empirical research in this area. Instead of the empirical results I offer a framework illustrating in how far the moderating variables on the firm-level, the home country level and the host country level influence the strategic location decision with regard to the level of corruptness of a country.
The levels of corruption (independent variable) as well as the firm-level, home- and host country variables (moderators) have a significant influence on the location choice (dependent variable) of a MNC. The independent variable, the level of corruptness of a country, can take place in different forms of unethical behavior such as for example bribery. The uncertainties and opportunities that result from this kind of environment display significance for a location
decision choice and also influence the entry modes of MNCs. This fact was brought forward through an intense literature study. In addition, firm-level, home- and host country conditions moderate the location choice of MNC. These factors either enlarge or weaken the effect of the level of corruption on the strategic location choice of a MNC.
26 | P a g e are a gray zone and the availability of events and facts are scarce. Furthermore, the firm-level factor of ethical standards did not appear to play a significant role for the researchers with regard to the location decision and the level of corruptness and has therefore been chosen as a
moderating variable.
27 | P a g e
5.
Discussion/ Conclusion
In this thesis the focus on the level of corruption of a country its influence the location decision of a MNC. Even though a lot of research has been conducted about the location decision and the underlying motives it is interesting to see that only few studies have been conducted about the location decision when it comes to the field of the level of corruption and its influence on
internationalization strategies of MNCs. There is hardly any literature to be found that explain in how far unethical behavior influences the location decision of a MNC. Hence, the focus in this research will be rather on unethical behavior, such as bribery and corruption, that is expressed by MNCs and which might influence their location decision to gain competitive advantages. Current scandals have shown that unethical behavior is a common practice in the international business and lead to an increased interest in this field of research.
From preliminary literature it is known, that the location decision is crucial for the success of a MNC. Several key drivers have been identified by scholars such as resources, infrastructure etc., until now though research linking ethical standards and location decision was nearly non-existent. The existing literature presents several findings that can be interpreted towards a conclusion that the willingness to make use of unethical behavior given in a highly corrupt country influences the location decision of MNCs.
One could start with the actual choice of location. The diversity of MNCs in their global actions gives them a good position and experience in conducting business in different
environments. From the literature found, one can conclude that MNCs tempt to bribe or exploit in business environments where these approaches are seen to be normal. So, the MNC adjusts their strategy to local conditions. The MNC adapt to these practices for two reasons, to keep up with their competitors that are acting in the same unethical way, or to gain competitive advantage over their competitors. In this process several other strategic management actions are taken under consideration as well, such as the strategic entry modes. In numerous articles (Rodriguez et al. 2005; Dunning 1980) it was pointed out that MNCs, when they internationalize to countries with a high perceived level of corruption, start their operations with joint-ventures (JV) or
29 | P a g e
TABLE 2
Bribery without border (Siemens)
Country Project Years Contract ($Mil.) Bribe ($Mil.)
Russia Hospital equipment ‘00-‘07 unknown $55.0
Argentina National ID card ’98-‘04 $1.000 $40.0
China High-voltage lines ’02-’03 $838.0 $25.0
China Metro trains ’02-’07 $1.000 $22.0
Israel Power plants ’02-’05 $$786.0 $20.0
Venezuela Metro rail lines ’01-’07 $642.0 $16.7
China Medical equipment ’03-’07 $295.0 $14.4
Bangladesh Mobile phones ’04-‘06 $41.0 $5.3
Nigeria Telecommunications ’00-’01 $130.0 $4.5
Mexico Refinery modernization ’04 unknown $2.6
Iraq Oil-foor-food program ’00-’03 $124.0 $1.7
Russia Traffic control system ’04-’06 $27.0 $0.7
China Hospital equipment ’98-’04 unknown $0.7
Source: S.E.C. ProPublica, The New York Times (http://www.nytimes.com/2008/12/21/business/worldbusiness/21siemens.html)
30 | P a g e
TABLE 2
Bribe Payers Index 2008
Rank Country BPI
1 Belgium 8,8 1 Canada 8,8 3 Netherlands 8,7 3 Switzerland 8,7 5 Germany 8,6 5 Japan 8,6 5 United Kingdom 8,6 8 Australia 8,5 9 France 8,1 9 Singapore 8,1 9 United States 8,1 12 Spain 7,9 13 Hong Kong 7,6 14 South Africa 7,5 14 South Korea 7,5 14 Taiwan 7,5 17 Brazil 7,4 17 Italy 7,4 19 India 6,8 20 Mexico 6,6 21 China 6,5 22 Russia 5,9
31 | P a g e We can see that Siemens used their bribery tactics in those countries, which are also pointed out by Transparency International to be willing to accept unethical behavior. One could assume that Siemens made the decision to locate their business in these countries because they could act unethical there.
Another factor that can be taken from this Figure is that countries from less developed countries are more likely to accept bribes than those from developed economies. This is also supported by the literature as for example Treismann (1997) states. The many factors that contribute to corruption tend to be more common in poorer countries and in economies in transition than in rich countries. Thus, at some point in time, economic development reduces the level of corruption of a country. However, at similar levels of development, some countries are perceived to have more corruption than others. It can be observed that corruption especially thrives in environments in which liberty, free press, stable politics and transparency do not exist. Hence, wealthier countries are characterized by higher levels of education, literacy, and growth of mass media, which have been found to be associated with less corruption. Yet another stream of researcher has found an opposite result to the problem as Wedemann (2002a) labeled this the “East Asian paradox”. Countries such as China, Indonesia, South Korea and Thailand have all enjoyed considerable growth in their per-capita incomes whilst enduring the reputation of being mired with corruption. Such observations suggest that there is more to the relationship between corruption and development than one is typically led to believe. Indeed, it would appear that, in some instances, this relationship is rather fragile and tenuous. But it needs to be stated that the unpredictability of these surroundings in a country will, in the long run, hinder FDI inflows. The investment will be too risky and thus in a risky way a chance for firms to make us e of unethical behavior to gain competitive advantage. The knowledge gained in such actions makes it easier for those firms to duplicate the actions and transfer this behavior to other destinations. Current research addresses the topic of corruption in international in several articles and so the topic gets a transparent to a broader audience. It can be clearly stated that the growth in international trade over the past few decades has raised concerns about differing business practices that can impede commerce and economic development. One such concern revolves around bribery and
corruption. Bribery and corruption are thought by many to be an unavoidable part of
32 | P a g e that corruption actually is a factor that needs to be taken in consideration. Whereas in the last decades location decision research dealt preliminary with the following factors markets,
resources, efficiency, and strategic assets (Dunning, 1998). Identifying additional variables can expand our knowledge of the locational advantages and their influence on FDI. To this end, corruption, a factor that has received attention lately, is included among the descriptors of the attractiveness of a location. This means that if corruption is taken in consideration, the unethical behavior of the executing participants in this unethical act need to be taken into account as well. That indicates that the willingness to engage in unethical behavior has an influence on the location decision of an MNC. To conclude, the variable of ethical standards as an influential factor in the strategic location decision needs to be taken into account by researcher. This statement, as conclusion of the research, can be seen as a contribution to this research area and will help scholars in further research to make use of a variable that is proven to be of importance.
The question that arises with this conclusion is how MNCs react to these circumstances in the coming years. This will fill a whole area of research and the fact that corruption is nearly impossible to measure makes this task even harder. Even though there are anticorruption programs it is still a problem to introduce them to corrupt countries because their legal and financial institutions are weak and often corrupt themselves. In such a setting, providing more resources to enforcement institutions may not be the right solution to the problem of corruption.
5.1 Complete Model
For future research a more comprehensive model is necessary, which includes a complete set of Firm-level, home- and host country factors. Although my model does not reflect all
33 | P a g e research. This would mean to split up the factor in the various bodies that have a stake in the firm, such as the shareholders, the employees etc. Another factor that certainly would help to complete the model are empirically- developed results that yet, need to obtained in this research area.
5.2 Limitations and Future research
Even though interesting findings are provided in this research, there are also limitations to the outcomes. The problem that occurs in this type of research is that companies would not talk about their illegal tactics, which makes a questionnaire unnecessary. The fact that
consequently secondary literature is used to reason certain facts might be a limitation as well, because it is never clear in how far these articles state the truth.
Further limitations concerning my field of research is the scarce amount of literature in the field of unethical actions in the business world. Furthermore, the example of Siemens that is presented is not that current because the upcoming of these events and the further discussion of the scandals may take time. The amount of given literature and the theories concerning business ethics and location decision though provided me with enough information to conduct a proper and interesting research.
Also the Index of perceived corruption which is used in this research has its limitations. The index used in this study conflates what might be thought of as two dimensions of corruption— the frequency of corrupt transactions in a country and their aggregate cost in bribes. It is possible that while corruption might be more frequent in federal countries, the competition between jurisdictions might keep the size of bribes low. For now, these questions await future research. Further work with new data and a broader search for appropriate instruments may also make it possible to reach less equivocal conclusions on some of the other factors such as the influence of democratic institutions and the extent of state intervention.
34 | P a g e
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