Government Corruption and the Entry Strategies - Essay Example

Controversy has reigned in respect of the corporate governance of Multinational Enterprises (MNEs), which has created problems regarding effective corporate governance in relation to activities of a corporate group and multinational enterprises (MNE), with practical difficulties of enforcement and accountability. This has led commentators to criticise the inherent limitations of the law as a tool for the regulation of MNEs, which is further compounded by the problems of state corruption and entry strategies for multinationals (Muchlinski, 2007). The focus of this paper is to undertake a review of the article of Rodriguez et al entitled “Government Corruption and the entry strategy of multinationals” and it is submitted at the outset that it is firstly necessary to undertake a contextual review of the central issues facing MNEs, government corruption and entry mode strategies, which I shall undertake in section 1 as a precursor to the detailed consideration of Rodriguez et al’s arguments in the article. Section 1: Contextual Analysis & Overview The limitations of the law as a tool for regulation of MNEs by states was further evidenced by the dictum of Slade LJ in the case of Adams v Cape ([1990] Ch 433) per Slade LJ where he asserted that “we do not accept as a matter of law that the court is entitled to lift the corporate veil against a defendant company which is the member of a corporate group merely because corporate structure has been used so as to ensure that legal will fall on another member of the group rather than the defendant company” (p.544). Moreover, the UK courts have struggled to address the commercial reality of group companies, indicating a distinct preference for maintaining the sanctity of the separate legal entity principle, which on the one hand arguably facilitates potential for entry mode abuse of the MNE structure or alternatively impedes entry mode depending on the nature of state corruption. Indeed, Rodriguez et al highlight the importance of entry mode strategy to MNE success and therefore it is submitted that the interrelationship between effective governance, corruption and entry level strategy is, which is arguably ignored by Rodriquez et al in their article. Additionally, group company structures often create problems of effective regulation and accountability, yet existing principles of law have arguably been stretched to ignore separate legal personality within a group, which clearly shapes entry mode strategy (Nygh, 2002). This further indicates a different dimension to the debate regarding corruption and MNE strategy as Rodriguez et al’s arguments centre on state corruption as the central point in impacting entry stage whereas the issues regarding the effective lack of governance of MNE’s under the law clearly raises the controversial issue regarding MNE corruption as part of its entry level strategy through exploitation of the lack of effective governance measures. Furthermore, the creation of an MNE corporate structure is often motivated by tax reasons or compliance with local requirements in order to enter the relevant market (Muchlinski, 2007). Accordingly, it is submitted at the outset that the lack of effective MNE governance through the legal framework clearly impacts business strategy to a degree that is ignored in the corruption debate as evidenced by Rodriguez et al’s arguments. Nevertheless, the overriding argument of Rodriguez et al’s article is that consideration should be given to the implementation or consideration of a simplified model for determining how corruption impacts MNE behaviour, which can be applied contextually when considering entry level strategy and this is further considered in section 2 below. Section 2: Rodriguez et al’s Central Arguments The central argument propounded by Rodriguez et al is the need to implement a comprehensive framework to consider the relationship between corruption and MNE entry mode strategy from a management level for future application in business strategy operations. In introducing the issue of corruption, Rodriguez et al argue that government infrastructure and the relevant arms of state will inherently be influenced by the government in power, which can lend itself to corruption. To this end, they argue that it is necessary to consider how the interrelationship between these factors impact MNE entry strategy. Rather than taking a dogmatic approach of the topic, Rodriguez et al acknowledge the limitations and potential ramifications to economic entry patterns, yet argue that businesses must face this head on with potential advantages in certain circumstances. However, it is important to note that the notion of corruption is inherently complex and Rodriguez et al highlight the importance of appreciating this and refer to a leading study of Shleifer & Vishny (1993) which highlighted that “the experience of operating in a corrupt environment is substantially characterised not only by the amount of corruption but also by the uncertainty associated with corrupt transactions” (383). Moreover, they refer to the polarised debate regarding the nature of corruption. On the one hand they refer to the line of argument that corruption can expand the public interest and to this end fail to consider the actual impact of corruption on MNEs. On the other side of the argument, is the proposition that corruption is actually an opportunity for political behaviour by MNEs, which in turn is exploited by their lack of regulation under law. Notwithstanding the polarised debate regarding the impact of corruption on MNE entry strategy, Rodriguez et al highlight the fact that there remains a lack of consensus and definitive model to characterise the concept of corruption in management literature. In contrast, it appears from the works of Bardhan, Johnston, Shleifer & Vishny that other forms of literature have considered this, but there nevertheless lacks a definitive model. As such, Rodriguez et al highlight the purpose of their article as follows: 1) Propose a meaningful framework for the differentiation of corruption environments; and 2) Further the understanding of corruption and how it affects multinational strategy at entry level (384). Moreover, Rodriguez et al hypothesise that the correlation between the two in terms of causative effect is vital to management strategy when considering entry level against a corrupt framework(384). As such, Rodriguez et al highlight that government corruption can have a concomitant effect on the organisational legitimacy of the MNE which in turn can impact the “entry mode decisions of multinationals” (383). In suggesting this, Rodriguez et al adopt the institutional theoretical approach, which they posit is appropriate in considering the problem in a contextual approach. These arguments are further supported if we consider by analogy the business entry mode choices in China since the first “open door” policy of 1979, with the continuous momentum of foreign direct investment (FDI) (Charles, 2005). Whilst foreign investors are ultimately autonomous on the mode of entry into the Chinese Market from equity joint ventures (EJV), wholly foreign owned enterprises (WFOE)and contractual or cooperative joint ventures (including licensing and technology transfer agreements) joint exploration, and co-operative development; it has been submitted that the reality of entry into the market has been challenging in practice (Luo, 2000). Indeed, Charles argues that it is the state infrastructure which will ultimately shape the entry mode choices into the market (Charles, 2005), which supports Rodriguez et al’s arguments. In the first section of the article Rodriguez et al argue that the inherent complexity of the nature of corruption and the entry strategy of MNEs necessarily means that “a simple theoretical framework is valid only as long as the simplification facilitates meaningful analysis while still capturing essential features of environment”(384). As such, the wide variances in and categories of circumstances covered by the umbrella of “corruption” renders it inherently difficult to formulate an all encompassing model for application in MNE strategy, which is acknowledged by Rodriguez et al. Indeed, they refer to the previous academic approach of categorisation of corrupt transactions by parties involved on a case by case basis on the one hand and aggregation of corrupt transactions on the other side “into a single index”(384). However the problem of such an ad hoc approach is it fails to aid the creation of management strategy when considering corruption vis-à-vis suitable entry modes (384). Indeed, Rodriguez et al’s article is a welcome approach insofar as it acknowledges the existing literature whilst diverging towards a practical and contextual based theory, for application in management strategy: “one of the main challenges of both describing corruption is addressing both its transaction and state specific characteristics. This problem arises because corruption refers to both a type of transaction – that is, one that involves the abuse or misuse of public power for private gain – and to a prominent statewide relationship among public officials”(384). As such, the nature of corruption will vary on a state to state basis in any given country. Indeed, they make the point that “when people say that corruption in Ukraine is different from corruption in Egypt, they are typically referring to an identical class of transactions but intend to accentuate the particular characteristics of the overall experience with corruption in the two countries”(384). As such, this would appear to highlight the crux of the problem and arguably the central limitation of Rodriguez et al’s attempts to formulate an all encompassing framework addressing corruption and management entry strategy for MNEs. The very fact that corruption will vary from state to state on the one hand arguably requires an ad hoc approach which cannot be restricted to a formulaic management strategy. However, Rodriguez et al propose to overcome this problem highlighting trends and “aggregate characteristics that apply to the set of all corrupt transactions with governments in a given country”(385). To this end, they address the obvious problem by separating the concept of “corruption” and explaining its origins and remedies (385). As such, they argue that corruption “in any state owes its nature and trajectory to a variety of economic, historical and institutional antecedents”. As such, this is important in focusing on the issue of corruption and its direct relationship with MNE behaviour and entry strategy on the one hand. On the other hand, the approach is arguably circular as corruption varies according to the state, which again leads us back to the central problem of trying to find an all encompassing formula. Nevertheless Rodriguez et al put forward what they feel are two key patterns differentiating corruption across countries; namely “persuasiveness and arbitrariness”(385). With regard to the concept of pervasiveness, Rodriguez et al extrapolate that this “is the average firm’s likelihood of encountering corruption” and refers to a general expectation of corruption in a state. To this end, Rodriguez et al posit that the concept of pervasiveness informs the extent to which a company will have to address corrupt behaviour. As such, “pervasiveness correlates with the necessity of actively addressing opportunities or threats posed by corruption, which may be substantial” (385). In context of MNE entry strategy, Rodriguez et al argue that pervasiveness requires heavy involvement with corrupt officials, which in turn “may offer some firms opportunities to internalise environmental threats” (385). . In contrast, under the arbitrariness approach, the article acknowledges that “corruption varies by more than just the degree to which it engages firms. Numerous empirical studies have highlighted varying degrees of uncertainty associated with corruption” (386). To this end, Rodriquez et al label arbitrariness as the term to cover the inherent ambiguity of the corruption concept. They further feel that arbitrariness provides a breeding ground for bribes and corruption of officials (386). In considering the two central dimensions of corruption, Rodriguez et al highlight the point that both pervasiveness and arbitrariness are independently insufficient to characterise the local environment in relation to corruption and that they are interrelated and must be considered simultaneously (387). To this end Rodriguez et al comment that a contemporary framework for the consideration of MNE entry strategy should move “to an environment where corruption is both more pervasive and more arbitrary” and that this should be utilised as a basis for framework for corruption when considering MNE entry mode decisions (387). Rodriguez et al acknowledge that corruption clearly reduces direct investment flows into an economy however this doesn’t cease entry completely. As such, they assert that the proposed framework’s “focus is on the influence of corruption on the entry decision” (388). Therefore, the relevant point for them in management entry strategy for MNEs is to consider how the nature of the corruption influences the choice of entry mode as an adaptive behaviour of MNE (388). As such, the mode of entry is critical and may be influenced by the consequences of corruption for the relevant MNE and Rodriguez et al comment that “within the substantial literature on entry mode choice, researchers have focused little on the influence of host country corruption” (388). As such they point to the lack of consensus on mode entry choice. Additionally, they feel that the literature overlooks the political behaviour of MNE which can operate as a defence from state threat to create economic opportunities for the firm: “yet nowhere can the actions of government and political actors be considered truly exogenous to MNE strategies, political and non-market transactions are often essential, especially where corruption is significant” (389). They further refer to the fact that theorists argue that effective MNE strategy requires adaptation to the institutional context. On this basis, Rodriguez et al comment that an entry strategy is inherently restricted by the state’s socially constructed norms of acceptable behaviour (398). In line with this rationale, Rodriguez et al propound that arbitrariness increases incentives to enter the market via the equity model of direct investment however this path renders it difficult to attain legitimacy and therefore MNE strategy requires the finding of alternative sources, which further increases benefits of external legitimacy through collaboration with local joint partners in the relevant state as opposed to wholly owned subsidiaries (390). However, such an approach solely focuses on the corruption issue and ignores the interaction of other factors such as state incentives and tax breaks that will influence MNE entry mode strategy. In contrast to the arbitrariness approach Rodriguez et al argue that pervasiveness increases the likelihood of a wholly owned subsidiary entry mode approach as the benefits of partnering are reduced and compliance with pressures to engage in corruption is expected (390). They expressly refer to Oliver’s extrapolation that “when institutional rules or norms are broadly diffused and supported the organisations will be predicted to acquiesce to the pressures because their social validity is largely unquestioned (Oliver, 1991: 169). As such, Rodriguez et al utilise this as a basis for their second proposition that “the higher the pervasiveness of corruption in a host country the higher the likelihood that the MNE will enter via a wholly owned subsidiary”. Whilst categorisation in this manner clearly highlights some key patterns, the propositions of Rodriguez et al are slightly contradictory in undermining earlier arguments that an entry model should consider the interrelationship between arbitrariness and pervasiveness in any given circumstance. Moreover, the propositions are consistent referring to a “higher likelihood” of particular entry mode and it is submitted should not be seen as a substitute for consideration of other important factors influencing entry mode strategy for MNEs. In putting forward a third proposition, Rodriguez et al refer to internal and institutional norms and internal legitimacy and argue that the entry mode is ultimately determined by institutional distance between MNE home and host country (390). This directly relates with the fourth proposition that “the positive relationship between the pervasiveness of corruption in a host country and entry via a wholly owned subsidiary is strengthened by an MNE’s previous experience with pervasive corruption” (392). To this end, Rodriguez et al argue that it is necessary to compare between countries and the type of corruption when considering MNE entry mode level, which leads to the fifth proposition that the positive relationship between pervasiveness and corruption and foreign direct investment is weakened as arbitrariness increases. As such, they argue that both act as a tipping point to the other in influencing entry mode strategy. It is submitted that the arguments put forward in this article are important in developing existing academia towards a practical approach with a purpose to categorising MNE entry mode strategy. Moreover, the approach is welcome in asserting the interrelationship between corruption and entry mode decisions along with the complex categorisation within the concept of corruption at state level as it impacts modes of entry. However, the focus of the article is corruption and in making the five propositions, Rodriguez et al arguably ignore the interrelationship of other extraneous factors impacting entry mode decisions. Nevertheless, the intrinsically complex nature of corruption, which differs at state level render it difficult to implement an all encompassing framework for entry mode strategy and it is questionable whether the posited MNE-wide code of conduct will address the issues in this area. Notwithstanding, the approach of Rodriguez et al is important in highlighting the need to undertake further research in this area. BIBLIOGRAPHY W. L. Charles (2005). International Business. McGraw Hill Dignam & Lowry (2006). Company Law.4th Edition Oxford University Press. Yadong Luo (2000). How to Enter China: Choices and Lessons. University of Michigan Press. Peter T Muchlinski., (2007). Multinational Enterprises and the Law. 2nd Edition Oxford University Press. Peter Nygh., (2002). The liability of Multinational Corporations for the Torts of their subsidiaries. European Business Organisation Law Review Volume 3: 51-81 Asser Press. Oliver, C. (1991). Strategic Responses to institutional processes. Academy of Management Review, 16: 145-179. Rodriguez, P., Uhlenbruck, K., & Eden, L. (2005). Government Corruption and the Entry Strategies of Multinationals. Volume 30 No. 2 383-396. Shleifer, A., & Vishny, R. (1993). Corruption. Quarterly Journal of Economics, 108: 599-617. Read More