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Business Ethics & Morality Assignment

Mark Regan

Question

Bribes to government officials, side payments to sidekicks, facilitation payments, donations


to political parties before election…. When is corruption morally corrupt? Analyse the critical
meaning of corruption in an international business setting and assess it’s economic and moral
impact.

1. What is Morality?

Morality is a term used in regular conversation, but it’s true meaning is often
misunderstood. Because there are several definitions for the term, there has been much
confusion when used in discussions. Many academics believe that a certain amount of time
needs be spent dealing with that confusion before one begins to use the term “morality” in
discussions.
For the purpose of this paper, “morality refers to an ideal code of conduct, one which
would be espoused in preference to alternatives by all rational people, under specified
conditions”1 . Morality generally refers to a code of conduct which is held to be authoritative in
matters of right and wrong. A persons morals are defined by culture, society, philosophy and
personal conscience, hence a person’s perception of morality varies greatly. In the domain of
corruption, it is important to analyse the situation from the perspective of each of the stake-
holders keeping in mind both long and short term affects.

1 Wikipedia, Morality, 3rd July 2009, http://en.wikipedia.org/wiki/Morality


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2. What is Corruption

The term corruption can be used in a wide variety of contexts, each having different
meanings. It is derived from the Latin term corruptio, meaning seduction from loyalty, diseased,
corrupt condition and is generally associated with moral decadence2. The concise Oxford
Dictionary defines corruption as evil, morally depraved or willing to act dishonestly in return for
money or personal gain3. In terms of social science, according to the Collins Dictionary of
Sociology (1995), corruption is, “the abandonment of expected standards of behaviour by those
in authority for the sake of unsanctioned personal advantage”. (Siergiejew, 2003)
The World Bank, an anti-corruption agency, define corruption in more simple terms as the
abuse of public office for private gain. The World Bank proceeds to categorise corruption into several
categories; Bribery, Theft, Patronage and Influence Peddling. Considering the above categories,
one would assume that corruption per se is easy to define and categorise. However, in reality,
corruption can manifest itself in many different forms within the aforementioned categories.
Depending on the observer’s ethical and moral background, an action may or may not be
labelled as corrupt.
In China for instance, building relationships with business partners is extremely important
and it would be customary for Chinese businessmen to exchange personal gifts or services. The
Chinese place significant importance in the concept of 關係 (Guanxi) and would not associate
such a gesture with corruption. This concept is central in Chinese society and describes the basic
dynamic in the complex nature of personalised networks of influence and social relationships. It
is possible that an observer from outside of China would mistake this gesture as corruption. In
particular, if the gift is being given to a person in authority, the motives might be seen as
dubious.
A persons perception of corruption depends almost entirely on their cultural, ethical and
moral values. In many cultures, Religion provides the underlying framework behind our ethical,
moral and cultural beliefs. In fact, religion and morality have been closely intertwined since the
beginning of western thought. The Greeks focused on the concept of homer, “a body of texts
transmitted first orally and then written down in the seventh century BCE” (Stanford
Encyclopaedia of Philosophy). Morality and religion are connected in the Hebrew Bible
primarily by the category of God's command. God issues a series of commands. Firstly, “Let
there be light”. Then, after the creation of animals, God gives a second kind of command, “Be
fruitful and multiply”. In the second chapter there is a third kind of command. God tells Adam
that he is free to eat from any tree in the garden, but he must not eat from the tree of the
knowledge of good and evil. When Adam and Eve disobey God, they are expelled from the
garden. “God is setting up a kind of covenant by which humans will be blessed if they obey the
commands God gives them”. (Stanford Encyclopaedia of Philosophy)

2 Babalon, Latin Dictionary, 1 July 2009, http://www.babylon.com/define/112/Latin-Dictionary.html

3 Oxford Dictionary, 1 July 2009, http://www.askoxford.com/concise_oed/corrupt?view=uk


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As we can see, corruption is a highly subjective matter that depends on a person’s ethical,
moral, cultural and religious beliefs. Both the extent of corruption and people’s perception of it
varies greatly across the world. However, despite the many definitions for corruption and it’s
subjective nature, researchers agree that corruption has damaging effects on democracy and
economic progress.

3. Why is Corruption Important in an International Business Context?

Corruption has a considerable effect on our lives because it is all around us. The
emphasis on making money is so great , the emphasis on getting rich, no matter how,
is so tremendous, that it influences virtually every aspect of our society.
- Lawrence Ritter

Corruption has received an enormous amount of attention in recent years. In particular,


academics and researchers have analysed the topic in detail. Organisations such as the World
Bank are very concerned about corruption and the effect it is having on countries throughout
the world.
Thankfully, the social science of corruption and it’s effects are better known now than 200
years ago. During this period, the world has changed dramatically and as a result, corruption
now poses a far more serious threat. The main reasons for the elevated importance of
corruption are inequality and international trade.
Over the past 200 years, the world has experienced a dramatic change. Appendix 2 shows
that in 1807, that the average life expectancy was less than 40 years for the vast majority of the
world. As countries began to develop and prosper, their health systems improved accordingly.
The present day reality can be seen in Appendix 1; developed and emerging economies have a
life expectancy between 65 and 85, whereas the poorest countries in the world (largely African
countries) have only improved marginally. In fact, the discrepancy between the rich and the poor
has only widened. It is this disparity that provides corruption with a solid foundation on which to
thrive.
With this in mind, It is important to consider both globalisation and international trade.
Both have caused an increase in foreign direct investment (FDI) in developing countries. This is
a natural progression as developed markets become saturated, trade barriers decrease and risks
associated with international trade decreases. As FDI is a critical driving factor behind the
emergence of developing countries, it is seen as a positive force in development.
However, the growth of international trade between countries of disproportionate wealth
has presented a serious problem in relation to corruption. Due to the disparity between income
levels, foreign investors are particularly susceptible to corruption. Developing countries often
have administrative procedures for international companies entering the the host market. The
developing country establishes these procedures to ensure that the multinational companies meet
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a set of standards so that the host county is not negatively affected. However, this presents
authorities in power with a moral hazard as they can demand additional payments to ensure a
successful application. Given the discrepancies in income level, a large demand by the host
country official is perceived as an relatively small amount by the multinational company. The
company is likely to pay the bribe in the knowledge that market power is secured and that the
cost of the bribe can be recouped through higher market prices. Ultimately, the public suffer
through higher costs and less efficient systems.

Fig 1
Population Growth (2000 - 2050)

Europe -64
Oceania +18
North America +130
Latin America & Caribbean +246
Africa +1,177
China, Aisa & India +1,561
-500 0 500 1000 1500 2000

Source: World Business Council for Sustainable Development

In relation to international business, corruption is more relevant now than ever before.
According to The World Business Council for Sustainable Development, the population of the
world will double between 2000 and 2050. The majority of this growth will occur in developing
countries such as Asia, India, China and Africa (Fig. 1). As businesses turn to developing markets
to expand internationally, they will be presented with the threat of corruption. The manner in
which they deal with corruption is of significant importance as it will have a profound effect on
the host country in question.

4. Economic Impact of Corruption

4.1 External Perspective

Considering corruption from a international business perspective, it can be viewed as a


risk associated with gaining entry into a foreign market. Business investment decisions are based
almost entirely on planning and risk. Companies use various models for assessing the risk
associated with gaining entry into a foreign country.
One of the basic models is Porter’s 5 Forces, as it describes the competitive forces within
the host country. Corruption can be considered part of government and legal barriers that are
included in “threat of entry” (Grant, 1998). Deep rooted corruption goes further to affect every
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aspect of Porter’s 5 Forces; Threat of New Entrants, Bargaining Power of Suppliers, Bargaining
Power of Buyers, Threat of Substitutes and Industry Rivalry (Siergiejew, 2003). As Porter’s 5
Forces is an indicator of market competitiveness, corruption directly affects a country’s ability to
attract FDI (Mauro, 1995).
Furthermore, for a single company that wants to expand internationally, corruption is a
barrier that also affects entry mode in addition to investment decision. Smarzynska and Wei
(2002) showed that a companies choice of entry mode is proportional to the level of corruption
and the companies technological sophistication (Appendix 3). When a specific threshold of
corruption is reached, the company decides not to enter the market.
The impact of corruption on FDI was first performed by Paolo Mauro in 1995. His
research analysed a sample of 67 countries and found that corruption negatively affects the ratio
of investment to GDP in both developed and developing countries. However, he found that
corruption was less evident in wealthy countries. As the majority of developing countries are
depending on FDI as a primary driver of future growth, significant efforts need to be made to
reduce corruption in developing countries.
Multinational companies often justify payoffs as a method of avoiding greater harm.
Others argue that corruption helps overcome bureaucratic inefficiencies and helps maintain
allocation efficiency. Although these companies believe they need to pay the bribe, they know
that they would be better off if nobody paid bribes.
It is possible to apply game theory to corruption in a similar manner to the “prisoners
dilemma”. The multinational company has two options; to partake in corrupt activities or to
report the corruption to local authorities (Siergiejew, 2003). Game theory would suggest that the
multinational company will partake in corruption if they cannot determine whether or not
competitors are also partaking in it. Furthermore, these companies know that they would be
better off if no party participated in corruption. Everyone would benefit in the long run by
reduced transaction costs and increased transparency. However, such is the secretive nature of
corruption that companies tend to be focused on the short term in corrupt markets.
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Fig 2
Investment Orientation: Market Potential vs Corruption

10
Market Potential/Attractiveness
Long Term A market’s attractiveness and/or
potential is indexed between 0 and
Market Potential/Attractiveness

8 Vision
10. Low potential relating to 0,
whereas high potential relating to
10.
6
Medium Term
Vision Transparency Index
Transparency International release
4 an annual Transparency Index (TI)
on the perceived corruption of 180
countries. A highly corrupt country
2 will score low on the TI whereas
Short Term
an uncorrupt country will score
Vision
high on the TI.
0
10 8 6 4 2 0
Transparency Index (TI)

Source: Author
Adaptation of Competitive Strength Matrix (Business Strategy Matrix)

Unfortunately, multinational companies often choose to partake in corruption as it is less


risky than confrontation. In doing so, the multinational company has done nothing to improve
the underlying situation for the better. In fact, partaking in corruption illustrates the company’s
short term orientation and vision. In an attempt to illustrate the effect corruption has on a
company’s investment orientation, an adaptation of the “Competitive Strength Matrix” can be
seen in Fig 2. Markets that are deemed to have high potential/attractiveness and low corruption
(high TI), tend to attract investments with a long term orientation. Conversely, markets that are
deemed to have a low potential/attractiveness and high corruption (low TI), tend to attract
investments with a short term orientation.

4.2 Internal Perspective

From an internal perspective, the economic impact of corruption may not seem obvious
to the normal person. However, businesses that operate in corrupt environments are exposed to
higher degrees of risk which merit higher rates of return. Companies will often increase prices
in order to absorb the cost of bribes and to account for the additional risk. Hence consumers
within corrupt countries will experience inflated prices.
In addition to this, corruption introduces inefficiency into into a society. When companies
can compete in a free market economy, the best or most efficient company generally wins.
Referring to Porters 5 Forces, markets that have low barriers to entry, high bargaining power of
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consumers, low bargaining power of suppliers and high threat of new entrants are generally
better for consumers. As companies legally compete to win market share, prices fall as
companies become more efficient. Similarly, when an employee gets a job because of his family
connections rather than ability, the company experiences a loss. In a corrupt environment,
businesses rely on paying bribes as their main source of competitive advantage and hence the
emphasis of becoming more efficient and innovative is diminished. Ultimately, the market
suffers through higher prices, lack of investment and inefficiency.

5. When is Corruption Morally Corrupt?

“Morality refers to an ideal code of conduct, one which would be espoused in preference
to alternatives by all rational people, under specified conditions”4. However, corruption is a
highly subjective matter which depends upon a persons, cultural, ethical, moral and religious
backgrounds. A person’s perception of corruption also depends upon their education and
understanding of corruption. Hence, it is difficult to define an ideal code of conduct that “all
rational people” will abide by, even under “specified conditions”. In many cases, the seemingly
black and white scenario has large portions of grey.
Despite our diversity, we can take inspiration from each other’s religion and culture. The
10 commandments tells us to love our neighbour, whereas the 5 Pillars of Islam talk about
taking care of others less fortunate then you. We can also take inspiration from each other’s
cultural beliefs. Indians believe in Karma, such that the effects of all deeds are viewed as actively
shaping past, present, and future experiences. Filipinos believe in Utang-na-loob, which
transliterates as "a debt of one's inner self ”5. It refers to the manner in which the Filipinos
accommodate the demands of the world around them. In terms of morality and corruption, we
need to consider the well being of everyone involved - particularly those less educated and less
empowered.
In an attempt to define “What is Morally Corrupt?”, we can use stake-holder theory as a
guiding framework. We can define stake-holders as any person or thing that is directly or
indirectly affected by an action. Corruption that disregards the fundamental rights and well
beings of it’s stake-holders, is an immoral act. Corruption that takes advantage of people’s
venerability's, lack of education or empowerment is the worst kind of corruption and is immoral
on every level. In certain countries, entire generations have essentially been wiped out due to
corruption in the education system. Children are forced to leave school when parents cannot
afford to pay illegal rents. It is immoral at a fundamental human level to deny a child the right to
an education through the pursuit of personal gains.

4 Wikipedia, Morality, 3rd July 2009, http://en.wikipedia.org/wiki/Morality

5 Wikipedia, Utang na loob, 6th July, http://en.wikipedia.org/wiki/Utang_na_loob


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Put simply, corruption is immoral when it disregards the needs of others at the expense of
personal gains. Corruption can sometimes act as a market mechanism that helps the efficient
allocation of resources. Unfortunately, it is difficult if not impossible to limit corruption to these
situations. The vast majority of corruption adds inefficiency, reduces FDI, increases inequality
and causes a misallocation of resources. Hence corruption negatively effects all stake-holders;
particularly the poor and vulnerable.
Based on principals, I consider all forms of corruption to be immoral as it negatively
affects it’s stake-holders on certain levels, either immediately in the future. Corruption breeds
corruption. In the same way cancer metastasis in it’s hosts body, corruption spreads throughout
a society. I accept that sometimes we need to take one step back in order to take two steps
forward. When doctors try to kill cancer cells by administrating kemotherapy, the patient suffers
by loosing their hair temporarily. In the case of corruption, sometimes we need to partake in
corrupt acts, in order to make progress. I believe that we can justify corruption on a moral level
provided the end justifies the means; such that a net positive benefit exists for the stake-holders
and that progress is being made towards eradicating corruption.

6. Conclusion

Morality is a term that spans many meanings. It is shaped by our cultural, moral, ethical
and religious backgrounds. Despite religious diversity throughout the world, morality at it’s core
is shared by all of human kind. Religious scriptures and ancient philosophy echo similar beliefs;
that we should “love our neighbor” and “take care of others less fortunate”.
Corruption is also a subjective term, of which our perception is dependent on culture,
religion and morals. The World Bank defines it as “the abuse of public office for private gain”.
Despite it’s subjectiveness and varying definitions, corruption “of all kinds undermines trust: it
inhibits social and economic development and undermines fair competition”6 . Given
globalization and the increase in international trade between countries of disproportionate
wealth, corruption is posing a far more serious threat than previously before. Developing
countries are highly dependent on Foreign Direct Investment (FDI) for economic growth. The
increased income disparity between investor and host creates a solid platform for corruption to
thrive.
Over the next 100 years the majority for future economic growth will come from
developing countries, attracting ever more FDI. Caution needs to be given to the threat of
corruption under these circumstances. In particular, the disparity between developed and
developing countries has widened over the past 200 years. As such, a concerted effort needs to
be given toward reducing inequality. As FDI is a primary driver in this effort, corruption needs
to be reduced as it is a significant deterrent of FDI (Mauro, 1995) and causes investors to adopt
a short term investment orientation.

6 Lord Browne of Madingley, Group Chief Executive, BP plc.


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Ultimately, corruption adds inefficiency into a system and increases the risk for investors.
Consequently, market prices are higher due to increased risk and increased transaction costs.
Deep rooted corruption causes companies to rely on paying bribes as their main source of
competitive advantage. This is opposed to innovating, taking risks and becoming more efficient.
Being morally corrupt is the lowest form of existence as the they take advantage of the
weak and most vulnerable in society through the pursuit of personal gain. By applying stake-
holder theory, morally corrupt people have total disregard for the well being of people, and have
no concern for the future well being of society.
By applying strict principals, all forms of corruption are immoral as it does not benefit
society over the long run. By removing corruption, we are creating value. In reality we
sometimes need to partake in corruption in order to make progress. However, this should not be
used as an excuse to partake in corruption indefinitely. One can morally partake in corruption
provided that there is a net positive benefit for the society, and that the corrupt act is made with
the intention of reducing overall corruption.
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References

Appendix 1
Life Expectancy vs. Income per Person 2007 (Inflation and Purchasing Power Adjusted)

Source: http://www.Gapminder.org

Note 1: The horizontal axis represents Income per Person and it is adjusted for inflation and purchasing power. Hence
comparisons can be made across time and region.

Note 2: Each continent is represented by a colour (see map top right) and the size of the bubble represents population.
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Appendix 2
Life Expectancy vs. Income per Person 1807 (Inflation and Purchasing Power Adjusted)

Source: http://www.Gapminder.org

Note 1: The horizontal axis represents Income per Person and it is adjusted for inflation and purchasing power. Hence
comparisons can be made across time and region.

Note 2: Each continent is represented by a colour (see map top right) and the size of the bubble represents population.
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Appendix 3
FDI Decision as a function of local corruption and firm’s technology

Source: Beata K. Smarzynska and Shang-Jin Wei (2000)


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References

World Business Council for Sustainable Development. 2009. Mobility for Development Report.
The World Business Council for Sustainable Development.
Transparency International. 2008. Global Corruption Report 2008. Cambridge University Press
Paolo Mauro. 1995. Corruption and Growth. The MIT Press: The Quarterly Journal of Economics,
Vol. 110, No. 3 (Aug., 1995), pp. 681-712
K.I.Golovshinskii, S.A. Parkhomenko, V.L. Rimskii, G.A. Satarov. 2004. Business and
Corruption: How To Combat Business Participation In Corruption. Moscow: INDEM Foundation.
David Nussbaum. 2006. Money versus Morality: Is corruption just a matter of misaligned incentives? London:
London School of Economics.
Jakob Svensson. 2005. Eight Questions about Corruption. Journal of Economic Perspectives-Volume 19,
Number 3, Pages 19 – 42.
Izabela Siergiejew. 2003. Effects of Foreign Direct Investment in Poland. Lund University: School of
Economics and Management.
Onukwufor, Maxwell Ejikeme. 2006. Political Corruption and Poverty in Nigerian Democratic Stare: Any
Grounds for Justification? Linköpings Universitet: Centre for Applied Ethics
Tina Søreide. 2004. Corruption in international business transactions: The perspective of Norwegian firms. Chr.
Michelsen Institute, Bergen, Norway.
Daniel Kaufmann, Aart Kraay, and Massimo Mastruzzi. 2006. Measuring Corruption: Myths
and Realities. The World Bank.
Unknown Author. 1999. Basic Methodological Aspects of Corruption Measurement: Lessons Learned From The
Literature and The Pilot Study. The Hungarian Gallup Institute.
Dr. Bruce Buchan. 2004. The Moral Physics of the Body Politic: Changing Contours of Corruption in Western
Political Thought. Griffith University
Beata K. Smarzynska and Shang-Jin Wei. 2000. Corruption and Composition of Foreign Direct
Investment: Firm-Level Evidence. World Bank.

Web Pages

Berclo. Corruption. 1 July 2009. http://berclo.net/page97/97en-corruption.html


Stanford Encloypedia of Phlosophy. Religion and Morality. 2 Juny 2009. http://plato.stanford.edu/
entries/religion-morality/
Ted. Bill Clinton on Rebuilding Rwanda. 2 July 2009. http://www.ted.com/index.php/talks/
bill_clinton_on_rebuilding_rwanda.html