Title : Organizational Isomorphism and Corruption: An Empirical Research in Russia. Author : Bertrand Venard Professor.

Audencia Nantes School of Management, France Research Fellow, Wharton Business School, USA. To be published in Journal of Business Ethics, (2009) 89 9:5976

Abstract institutional literature, this paper aims to show the influence of Based on neo-institutional organizational isomorphism on corruption. The focus is institutional explanations of corruption. tion. Our model is based on empirical research in Russia at the end of the 1990s. A face-to-face face questionnaire was conducted with 552 top executives in private firms across various economic sectors. We used the structural equation model Partial Least Squar Squares, PLS, technique to test our hypotheses. The developed model provides an integrated approach to the study of the relationship between corruption and organizational isomorphism. Our empirical data from firms in Russia allowed us to test various theoretical l hypotheses concerning the influence of organizational isomorphism on corruption. Our emphasis is on the influence of competitive and institutional isomorphism on corruption.

Keywords : Corruption

Business Ethics

Transition Economies

Russia

Electronic copy available at: http://ssrn.com/abstract=2065274

Introduction Research about corruption has received much attention in recent years (Rodriguez et al., 2006; Uhlenbruck et al., 2006; Ashford et al., 2008). Concurrently, many international organizations have implemented diverse anti-corruption strategies. For example, thwarting corruption is a key task of the European Bank for Reconstruction and Development (EBRD), the World Bank, the United Nations and the Organisation for Economic Co-operation and Development (OECD). In 1997, OECD promulgated a Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD, 2007). One important reason for the involvement is the impact of corrupt practices on social and economic development (World Bank, 2000; United Nations, 2002, 2008; Aguilera et al., 2008). Corruption is obviously an important ethical problem for any society. Furthermore, numerous studies show the negative impact of corruption on economic development (Mauro, 1995; Rose-Ackerman, 2002). Most studies show a significant negative relationship between corruption and various measures of economic welfare, including per capita income, Gross Domestic Product growth (GDP), and innovation (Shleifer, Vishny, 1993; Mauro, 1995; Rivera-Batiz, 2001).

An important research purpose is to study why firms adopt corrupted behaviors. One reason could be found in the quality of institutional framework. Various research has shown that the higher the quality of the institutions, the lower the prevalence of corruption (Rose-Ackerman, 1978, 1999; Gerring, Thacker, 2005; Rodriguez et al., 2006). One key explanation of this relationship is due to the fact that firms may adopt similar behaviors (especially corrupted practices) because of similar institutional constraints. The tendency of a given firm to imitate other organizations has been called organizational isomorphism (DiMaggio, Powel, 1983). The purpose of this paper is to study the institutional explanations of corruption in Russia, with emphasis on the influence of organizational isomorphism on corruption. Our model is based on empirical research in Russia at the end of the 1990s. Face-to-face

Electronic copy available at: http://ssrn.com/abstract=2065274

questionnaires were conducted with 552 top executives of private firms across various economic sectors. The paper is divided in four sections. The first section presents the literature review concerning organizational isomorphism and corruption. This review will lead us to propose a theoretical model. The second section describes our empirical research method. It should be noted that we used a structural equation modeling called the Partial Least Squares, PLS technique to test our hypotheses. The third section examines the empirical results, including a description of the structural equation model results. The last section is our conclusion. Theoretical Background An important part of the study of corruption is the examination of its different definitions. Obviously, the definition of corruption determines how to measure and analyze it (Gibbons, 1988; Jain, 2001). From a legal perspective, authors defined corruption with an emphasis on the transgression of legal norms (Nye, 1967; Turrow, 1985). From a social perspective, others researchers have described corruption as transgression of social norms (Brooks, 1970; Gibbons, 1988). Based on these earlier definitions, authors have tried to combine both perspectives. For example, Holmes defined corruption as an illegal (law perspective) or improper action (social perspective) (Holmes in Bull and Newell, 2003 : 193). The expression deviation from public interest could also be understood as a deviation from legal norms or social norms (Morris, 1991). In line with the concept of deviation from public interests, a commonly used definition is a manipulation of powers of government or sale of government property, or both by government officials for personal use or private benefit (Jain, 1998, 2001; Shleifer, Vishny, 1993; Lambsdorff, 2007). This definition leads to the analysis of illegal behavior involving civil servants and the effect of these behaviors on private interest. It is true that many researchers focus on civil servants in corruption transactions (Evans, Rauch, 2000; Van Rijckeghem, Weder, 2001). The original aim of our research was to examine firms illegal behavior (rather than civil servants behavior) when analyzing the influence of organizational isomorphism on corruption. It should be noted that corruption requires obviously two or
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more parties to organize a corrupted transaction, at least one of whom holds a position of public trust and/or exercises a public role and another (or others) of whom acts in private capacity (Lapalombara, 1994). In this paper, corruption will be measured as the frequency of unofficial payments by firms to public officials in exchange for various services or other advantages. One key explanation of corruption within firms is the quality of institutional framework. It is true that firms are constrained by their institutional environments, which could have social, cultural, economic or political dimensions (Scott, 1995). When the institutional framework is weak, enterprises have more freedom to adopt unethical behaviors in order to maximize their interests (Venard et al., 2008). Studies have concluded that the higher the quality of an institutional framework, the lower the chance for corruption (World Bank, 1997, 2000). For example, Gerring and Thacker reported that the higher the regulatory quality (a component of the institutional framework), the lower the incidence of corruption (2005). As a consequence, institution building is one of the key factors for fighting corruption (Rose-Ackerman, 1978, 1999; World Bank, 2000). Various academics have suggested that due to institutional forces, firms may have a tendency to adopt similar behaviors, such as identical corrupted behaviors (Venard et al., 2008). Thus, the strength of the institutional framework may imply the existence of an organizational isomorphism which could be defined as the tendency of firms to model themselves on other organizations behaviors (DiMaggio, Powel, 1983). Isomorphism was defined by Hawley as a constraining process that forces one unit in a population to resemble other units that face the same set of environmental conditions (1968). Organizational isomorphism is then the trend of organizations to become homogeneous and pursue similar actions, including corrupted behaviors. The concept of isomorphism was studied by Meyer and Rowan who tried to understand the quest for legitimacy of firms (1977). DiMaggio and Powel followed their work but focused on the mimetism of organizations. The authors tried to explain why firms are so similar in contemporary society (1983). While many authors have surveyed the diversity of organizational forms (Woodward, 1980; Budde et al.,1982), DiMaggio and Powel sought to explain
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homogeneity and not variation. Rose-Ackerman used the term reference group to highlight the tendency of firms to adopt the same corrupted activities of other members of their reference groups (2002). Thus, if successful peers used corruption in their business activities, other firms may imitate their unethical behaviors (Venard et al, 2008). INSERT FIGURE 1 To understand the influence of organizational isomorphism on corruption, it is necessary to further investigate the various components of isomorphism. DiMaggio and Powel identified two types of isomorphism: competitive and institutional. On one hand, competitive isomorphism is pressure on organizations to copy successful organizations because of market competition (DiMaggio, Powel, 1983). One of the first research theories to link competition and corruption was devised by Rose-Ackerman (1978). Various authors have showed that the higher the competition, the lower the tendency for corrupted behaviors. For example, Ades and DiTella showed that corruption is greater in countries in which domestic firms are sheltered from foreign competition (1999). Evenett and Hoekman also assessed the impact of the increase of competition on the decrease of corruption, taking into account procurement markets (2004). Other authors have showed that international competition reduced corruption (Sung, Chu, 2003; Gerring, Thacker, 2005). The orthodox hypothesis is then that the higher the competition, the lower the corruption. However, Ades and Di Tella recognized that the link between competition and corruption is not as obvious (1999). Contrary to the previous orthodox hypothesis, Bliss and DiTella stressed that growth of competition may increase corruption (1997). For example, firms facing a sudden increase of competition may try to secure their rents with corrupted behaviors (Ades, DiTella, 1999; Venard et al., 2008). Based on the work of Leite and Weidemann (1999), Lambsdorff also argued that economic liberalization may not immediately reduce corruption (2007). Working in transition economies, Tavares has similarly shown that the immediate effect of economic liberalization is to increase rather than decrease corruption (2005). The author also argued that once a socialist system is
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abandoned, the level of corruption increased. For example, privatization processes in transition economies may be a source of corruption as investors jockey for position (Pope, 2000 : 20). In the case of transition economies, the collapse of the Soviet Union led to a large increase of competition. Former communist countries, such as Russia, faced transformation from state monopolies to market forces nearly overnight. In such circumstances, firms may have adopted corrupted behaviours to secure their business positions (Venard et al., 2008). The following discussion implies our first hypothesis H1: The higher the competition, the higher the corruption. On the other hand, institutional isomorphism occurs via three mechanisms: coercive, mimetic and normative (DiMaggio, Powel, 1983). Coercive isomorphism refers to the fact that firms are constrained by other, more powerful social actors (Mizruchi, Fein, 1999). Coercive isomorphism refers to the influence of key institutions on organizations behaviors. Obviously, the State is an important powerful actor in setting up important rules of the economic game which constrain firms in various decisions. Meyer and Rowan have also argued that organizational structures are influenced by the rules set up by the State (1977). An example is the ability of the State to promulgate laws that affect organizations behaviors (DiMaggio, Powel, 1983). Coercive isomorphism is an important mechanism to take into account in fighting corruption. Various international organizations and researchers have highlighted that institutional framework is a key to reducing corruption (World Bank, 2000; Pope, 2000). Thus, in research from a database of 18 OECD countries, Dreher, Kotsogiannis and McCorriston showed that the higher the institutional quality, the lower the corruption (2005). Lambsdorff has also described various institutional constraints as real enemies of corruption (2007). Our hypothesis is therefore, H2: The higher the quality of the institutional framework, the lower the corruption. The quality of the institutional environment is based on a diverse set of elements which should be taken into account (Scott, 1995). It is necessary to define key components of
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the institutional framework which constrain corruption. Theoretical literature gives various answers. Firstly, as noted earlier, the quality of a legal framework is an important element to consider. The laws obviously regulate social activities. They give limits that differentiate acceptable (in a legal point of view) from non-acceptable behaviors. Various researchers have shown the influence of regulation on corruption. For example, Gerring and Thacker reported a positive correlation between regulatory quality and absence of corruption (2005). Similar results were also obtained by Goel and Nelson when they demonstrated the positive association between government regulation and corruption (2005). There is a strong argument in corruption literature linking the increase of the regulatory quality with the decrease of corruption (Ades, DiTella, 1996; Djankov et al., 2002). Secondly, laws are useless if they are not enforced (North, 1991). If the laws are not enforced, they have a very limited influence on social behaviors. Thus, Lambsdorff and Cornelius have stressed the importance of evaluating the application of law rather than the quality of regulation itself (2000). The enforcement of law should reduce the incidence of corruption. Among other research, Herzfeld and Weiss exhibited the impact of the law enforcement, particularly the strength of the court system, in reducing the level of corruption (20003). This was also demonstrated by Ades and DiTella when they showed the positive relationship between the independence of the judicial system and the decrease of corruption (1996). Similarly, Frye and Shleifer described the invisible-hand model, which describes a well-organized government, which is generally uncorrupted and provides basic public goods, such as contract enforcement (1997). Thirdly, an important part of institutional framework is composed of the financial markets (Zysman, 1983; Venard et al., 2008). Whitley highlighted that the assessment of an institutional framework should be based partly on the evaluation of the quality of financial markets (1999). For example, Cox studied different countries by their different types of financial institutions (1986). For any firm, the ability to finance its activities is essential. Investing in a new plant, in a R&D project or in a new subsidiary imply
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securing necessary funding. Some studies have showed the link between the financial market quality and the level of corruption. Thus, low international financial integration has been associated with an increase in corruption (Edison et al., 2002)(financial international integration is the degree to which an economy does not restrain cross-border transactions). Another study stressed the fact that countries with wide-spread corruption suffer from low rates of return to capital before the liberalization of international financial transaction (Rivera-Batiz, 2001). The previous discussion leads to the following three hypotheses: H2a: The higher the quality of the legal framework, the higher the quality of the institutional framework. H2b: The higher the quality of law enforcement, the higher the quality of the institutional framework. H2c: The higher the quality of the financial markets, the higher the quality of the institutional framework. Mimetic isomorphism is the tendency of firms to model themselves on other organizations behaviors (DiMaggio, Powel, 1983). Facing uncertainty, firms may poorly understand environmental transformations. A reaction may be the imitation of firms in the same economic sector. In particular, companies may decide to follow the path of more successful peers (Haveman, 1993). This is in line with the ecological perspective which predicted that leading firms might be imitated by less successful firms (Hannan, Freeman, 1977). The successful behavior of the leading firms might serve as a reference for others. Thus, scholars have highlighted that firms may imitate the corrupted behaviors of other organizations. For example, Rose-Ackerman argued that within a reference group, firms may adopt similar corrupted activities (2002). Our hypothesis is thus: H3: The higher the unfair behaviors of competitors, the higher the corruption of the firm.

Normative isomorphism is defined as the collective struggle of members of an occupation to define conditions and methods of their work, to control the production of procedures (DiMaggio, Powel, 1983:152). DiMaggio and Powel have highlighted the importance of selection and education as a source of normative isomorphism. However, there are various other sources of norms for any organization. In this paper, we study intra-group normative isomorphism and we focus on a specific source of norms: the influence of the headquarters on its subsidiaries. When a head office is abroad, we could predict that the multinational will spread ethical norms, implying a reduction of corrupted practices in its local subsidiaries. A subsidiary faces pressures toward a certain conformity to the strategy and objectives of the head office (March, Olsen, 1989). This is especially true since most multinationals originate in developed countries where corruption is both forbidden and less important than it is in emerging countries (Mauro, 1995). Thus in 1997, OECD promulgated a Convention on Combating Bribery of Foreign Public Officials in International Business Transactions with a main purpose of fighting corruption around the world (OECD, 2007). When a country has ratified the convention, its national firms are subject to strict anti-corruption laws. The OECD AntiBribery Convention requires countries to impose tough sanctions including fines and imprisonment for bribery of foreign public officials, also referred to as foreign bribery. Despite the fact that Russia had not (and still has not) signed this convention at the end of the 1990s, various key countries from which multinationals originate have signed the convention. Facing important and potential sanctions at home, multinationals will be reluctant to use corrupted practices in Russia. To assess the likelihood of normalization by a multinational in its Russian subsidiary, we will assume that higher the financial stake of the multinational in its local firms, the more control it will have over its subsidiary. Our hypothesis is therefore H4: The higher the financial stake of the multinational in a local firm, the lower the corruption.

As we have described earlier, government interventions could be necessary to build adequate institutional frameworks in order to decrease corrupted practices in organizations. For example, governments may build a legal framework to fight corruption. However, government intervention is also a source of potential corruption. In
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the grabbing-hand model, a government is interventionist and consists of a large number of bureaucrats pursuing their own agendas, including taking bribes (Shleifer, Vishny, 1993). Johnson, Kaufman and Zoido-Lobaton have highlighted the influence of the politicization of an economic activity on corruption (1998). Politicization of an

economic activity means the exercise of control rights over firms by politicians and bureaucrats (Johnson, Kaufman, Zoido-Lobaton, 1998). In most countries, politicians maintain property rights in firms. However, residual control rights may serve the private agenda of politicians and civil servants. Government intervention designed to correct market failures require the use of different bureaucrats to make decisions, but also may create opportunities for civil servants to adopt corrupted behaviours and demand bribes (Acemoglu, Verdier, 2000: 95). If the state does not protect economic agents from unlawful expropriation, the agents may protect their properties by establishing corrupt relationships with public officials (Sonin, 2003). However, we should note the difference between a governments influence in implementing a friendly business environment (notably within an adequate legal framework and law enforcement base) and the intervention of the government in the functioning of private firms (Venard et al., 2008). At a macroeconomic level, political intervention leads to a transformation of institutional context, according to the invisible hand model. The government restricts itself to providing public goods, such as regulation and law enforcement, and it leaves most allocation decisions to the private sector (Frye, Shleifer, 1997), which thus leads to a decline of corruption. At a microeconomic level, however, the government could interfere in private firm decisions. This result stressed the ambiguity of politicization on the economy. On one hand, government intervention could create opportunities for bureaucrats to ask for bribes. This could lead to an increase in corruption. On the other hand, government intervention is necessary to develop an appropriate business system, especially in transition economies (Whitley, 1999). For example, oligopolies in Russia may try to secure their economic rents through unfair business practices (such as corruption). State reactions could be to promulgate and enforce new laws, but also to control private firm decisions. Our last hypothesis is therefore: H5: The higher the level of politicization of economic activity, the lower the level of corruption.
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Russian Context One reason for selecting Russia for this research is the importance of corruption in this country at the end of the 1990s. The country has a long history of corruption. At the fall of the Soviet Union, Communist countries had a strong tradition of criminal economic activities such as corruption (Ryvkina, 1998; Venard, 2001a; Duhamel, 2004). The high level of corruption in the Soviet command system affected the performance of the economy (Satter, 1996; Venard, 2001b; Harrison, Kim, 2006). Under the communist system, the centrality of power of the State went so far in depoliticization of the population that cynicism, hopelessness and passivity developed as a shield against the authority (Bialer, 1991-1992). Fisher also claims that one of the greatest consequences of the Soviet system was to create a new kind of human being, a person without moral values (1993). Another reason for choosing Russia is the fact that the country faced a transition process after the fall of the Soviet Union. In 1985, Mickael Gorbatchev initiated Perestroika, an economic plan to construct foundations of a law-governed state. This target was not achieved by Gorbatchev and his successor Boris Yeltsin (White, 2000). The period of Russian transition from planned to market economy in the 1990s is often presented as a withdrawal of state from the economy (Ryvkina, 1998). Attempts were made to introduce economic changes without first creating the appropriate, necessary and enforceable institutional processes through which they could be effectively regulated (Kneen, 2000). Russian firms had to adapt to the new institutional environment and many of them chose to use corruption as a means to secure their economic rents (Duhamel, 2004). The most dramatic opening of corruption opportunities occurred as a consequence of the implementation of shock therapy beginning in 1992 (Kneen, 2000). Shock therapy reform programs aim to stabilize the macro-economy by liberalizing prices and privatising enterprises (Intriligator, 1996). The market reforms initiated by Yeltsin were accompanied by a fall in GDP during most of the 1990s. The liberalization of the Russian economy created a favourable environment for the expansion of the traditions of the Soviet shadow economy, accounting for about 40% of the economy in 1996 (Ryvkina,
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1998). Avtonomov noted that at the time, the Russian government considered the corrupted large firms as its only allies and gave no attention to small business companies who were not protected from their deadly enemies, bribe-seeking local civil servants (2006). The Russian governments collusion in corrupt practices reached its height in 1995 in the loans-for-share privatisation program (Celarier, 1997). According to the collateral auctions schemes, very lucrative portions of State properties were given as collateral for loans extended to the government. The terms of the auctions were specifically designed in such a way that the winner was predetermined. After the 1996 presidential election, collateral auctions were realized in the form of payments for political support of Yeltsin during his election campaign (Avtonomov, 2006). In several cases, select banks running the auctions also became the owners of the privatised firms (Celarier, 1997). The Minister responsible for privatisation, Anatolii Chubai, summarized the situation property in this country belongs to whoever is nearest to it (in Kneen, 2000). With a legacy of corruption during the communist period and a failure of reforms after the August 1991 putsch, Ryvkina described Russia at the end of the 1990s as criminal oligarchy with a monopolistic State (1998). At this time, a western businessman captured the general perception of business conditions in Russia: Business ethics in Russia? I have never heard of it (Taylor and al., 1997). As a matter of fact, the Russian State had created a corrupted cadre of government bureaucrats, who were frequently engaged in rent-seeking behaviour (Johnson, and al., 1998; Safavian and al., 2001). Frye and Shleifer described the Russian system at the end of the 1990s as the grabbing-hand model of government with many bureaucrats pursuing their personal goals by securing bribes (1997). Method To test our theoretical model, a method of direct collection of data through face-to-face interviews was used (See figure 1). The survey was done in Russia in 1998 as part of the EBRD (European Bank for Reconstruction and Development) and World Bank Business
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Environment and Enterprise Performance Survey. Since our research focused on the link between organizational isomorphism and corruption, the period of time is not crucial. Our objective was to test theoretical hypotheses concerning corruption in Russia and not to describe corruption in emerging countries at the end of the 1990s. The Russian population of enterprises was studied in order to obtain a breakdown of private sector firms. This was necessary to conduct the survey using a quota method. Table 1 describes various elements of the sample. The sample was built via the quota method using three criteria: industry category, number of employees and location. The final sample was similar according to the three criteria of the population of private firms in Russia. Accurate sampling of enterprises was crucial for ensuring that the research findings were representative.

The survey (and therefore, the questionnaire) was specifically designed to provide feedback on the state of private enterprises, to measure the quality of governance and public services, including the extent of corruption, and to provide concise information on constraints to private sector growth from an enterprise perspective. The first draft questionnaire was originally written in English and then translated into Russian. To ensure that the translation was correct, a second translator translated the Russian questionnaire back into English. The test of the questionnaire was then done with five interviews. The test helped to improve the questionnaire in order to avoid any ambiguity. The test was done to ensure the questions could be administrated face-to-face. The final questionnaire was divided into two parts. The first part concerned the description of both the firm and the respondent. The second part contained 70 questions to assess various elements of the business environment, the importance of corruption and various elements concerning experiences and practices regarding corruption (See Table 2 for question examples).

Companies were contacted by phone to ensure that the firm matched the relevant quota criteria and to arrange appointments with prospective respondents. Interviews were done at respondents offices by trained interviewers. Interviews were conducted face-to-face using the specially-designed questionnaire and lasted between one and two hours. For
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some interviews, a manager went with the interviewers to control the interview process. One in six interviews was audited by a phone call to the respondent to check that the interview was properly conducted and some questions were re-asked to insure accuracy. In case of any discrepancy, all the questionnaires of the problematic interviewer were back-checked. All questionnaires were coded and data entry was done by appropriate, trained staff.

512 interviews were conducted with firm managers or owners in site visits in Russia in 1998. Most respondents were in the top management tier of their firms. 38% of respondents were chief executive officers, presidents or general managers and 27% were executives holding other positions (most commonly directors of various divisions). The remaining 35% had managerial positions such as finance managers. The private firms sample was divided between the building/construction sector (25%), the agriculture, farming, fishing and forestry sector (23%), trading/wholesale (15%), and retail (14%). This corresponded to the breakdown of private Russian firms at the late 1990s. All enterprises were private firms, although a smaller (5% or 25 out of 552), were partly owned by a state organization or a state agency.

A key challenge in an empirical survey about corruption is to obtain honest answers from the respondents (Lancaster, Montinola, 2001). Empirical data on corruption is difficult to obtain (Lambsdorff, 2007). The illicit nature of corruption implies that respondents may be reluctant to give details about their hidden and forbidden behaviors. In order to get true answers from respondents, some precautions were undertaken. Firstly, the interview process started with a short speech by the interviewer about anonymity for both the participating firm and the respondent. Secondly, all respondents were told that their answers did not prove that they approve or disapprove corruption. Thirdly, respondents had to answer to questions concerning firms like yours. This indirect questioning made respondents less reluctant to answer. Fourthly, respondents did not give answers directly but provided a number assigned to a never/always scale for the chosen answer. Thus, after the question How often do firms like yours nowadays need to make extra, unofficial payments to public officials to gain government contracts?, a card was shown
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to the respondent with the various possible answers on the scale, from never to always. If the answer was always, rather than having to say always, the respondents only had to provide a number, which is a less emotionally charged answering method. Examples of various questions are given below in the Table 2.

INSERT TABLE 1, 2 and 3 The dependent variable the level of corruption was evaluated as the frequency of unofficial payments by firms to public officials in exchange for various services or other advantages. In order to characterize and measure this variable, a set of seven questions was given to respondents. An example of a question is: How often do firms like yours nowadays need to make extra, unofficial payments to public officials to gain government contracts?. Other questions were asked to assess if respondents gave unofficial payments to get connected to public services, to get licences and permits, and to handle issues for taxes and tax collection, etc. For each question, the respondent had to indicate the frequency using a weighted, 1-6 never/always scale. Exploratory factor analysis (EFA) across the seven questions indicated sufficient convergence to suggest that it was valid to incorporate all questions into one measure (Cronbachs = 0.8155). The EFA identified only one dimension for this variable. The same method was used for the other variables (See Table 4). For example, the assessment of competition level is usually done through an evaluation of five forces: the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of substitute products or services (where applicable) and jockeying among current contestants (Porter, 1979, 1980). Therefore, six questions were asked to respondents to evaluate the pressure of local competitors, the pressure of foreign competitors, and the pressure of customers in various key strategic decisions. An example of a question is Please rate the influence of the pressure from domestic competitors on key decisions about your business. A scale of 1 to 6 (1 for low, 6 for very high) was used. Exploratory factor analysis (EFA) across the six questions indicated sufficient convergence to suggest that it was valid to incorporate all six items into one measure (Cronbachs = 0.7807). The EFA identified only one dimension for this variable.
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Another example concerned the evaluation of the quality of financial markets. The quality of financial markets varies on a number of dimensions. A crucial element to evaluate the quality of financial markets is its ability to allow firms to easily gain capital (Whitley, 1999: 49). For example, Zysman described capital-market-based financial systems where capital is largely distributed through liquid markets which trade and price financial claims through the usual commodity-market processes (1983). In this paper, the quality of a given financial market is measured considering the ease which any entrepreneur or company can obtain financing for his/her project (Rajan, Zingales, 2003). Therefore, the more money banks have to lend and the easier it is to access banks, the higher the quality of a financial market. The easier it is to access non bank equity investors, the higher the quality of financial markets. Five questions were used to assess the quality of financial markets such as Can you tell how problematic the lack of access to long-term bank loans is for the operations and growth of your institution?. The EFA identified again only one dimension with a Cronbachs of = 0.7551. Examples of questions for all the variables are given in the Table 2. Data Analysis Our theoretical model was tested using a structural equation modelling technique called Partial Least Squares, PLS (Wold, 1985). PLS method is oriented toward predictive applications and the explanation of variance as a regression, in which R and the significance of relationships among constructs (using Ordinary Least Squares, OLS techniques) indicate how well a model performs (Barclay et al., 1995). Conceptually, PLS is an iterative combination of principal components analysis relating measures to constructs, and path analysis permitting the construction of a system of constructs (Barclay et al., 1995 : 290). The PLS approach generates estimates of standardized regression coefficients (i.e., path coefficients or in this article), which can then be used to assess the relationships between latent variables. PLS also generates factor loadings of the items used, which are interpretable within the context of principal component analysis
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(Bookstein, 1986). PLS does not make assumptions about (1) data distributions to estimate model parameters, (2) observation independence, or (3) variable metrics (Wold, 1985). These unrestrictive assumptions led us to select PLS over other structural modelling techniques (see Barclay et al., 1995, for a detailed explanation of the PLS technique).

INSERT TABLE 4 and 5 Intercorrelations of all variables used in this study are provided in Table 3. Partial support for our hypotheses can be seen in the correlation matrix provided. The quality of institutional framework correlated positively with the quality of financial markets (The Pearson correlation coefficient is noted r = + 0.4683 and the correlation is significant at p<0.05), the quality of the legal framework (r = + 0.1135, p<0.05) and the quality of the law enforcement (r = + 0.2962, p<0.05). As predicted, the intensity of competition also correlated positively with the importance of corruption (r = + 0.2634, p<0.05). Furthermore, the importance of corruption was only slightly and negatively correlated with the quality of the institutional framework (r = - 0.0910, p<0.05). The level of corruption correlated positively with unfair behaviour by competitors (r = + 0.1810, p<0.05). The importance of foreign stakes in local subsidiaries correlated negatively with the level of corruption (r = - 0.2479, p<0.05). Finally, the politicization of economic activity correlated slightly negatively with the level of corruption (r = - 0.1354, p<0.05). All those correlations are in line with our theoretical model (See Figure 1).

PLS generates statistics to test the reliability and validity of constructs with two or more indicators. As shown in Table 5, the indexes had at least a Cronbachs above 0.75, which is above the suggested reliability level of 0.70 indicated by the statistical literature (Nunnaly, 1978).

INSERT TABLE 5 Results of PLS analysis used to test the hypotheses are summarized in Table 5. Our model explaining the quality of the institutional framework is significant, with an R of
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0.2504 (See Table 5). The combination of variables predicts 25% of the variance concerning the quality of the institutional framework. Overall, our model shown in Figure 1 and tested using PLS has an R of 0.1873. The combination of variables predicts 18% of the variance concerning the level of corruption.

Our model gives a stimulating explanation of corruption considering environmental and organizational factors. Firstly, in our competitive isomorphism hypothesis, we predicted that an increase of competition in Russia was likely to lead to an increase of corrupted behavior. The path coefficient between the intensity of competition and the level of corruption was positive and significant (= 0.2519, p<.05). Thus, hypothesis 1 was supported. Competitive isomorphism is an explanation of the level of corruption. The greater the competition between private firms, the greater the corruption. Based on our empirical results, Russian firms facing an increase of competition had the tendency to use corruption to secure their economic rents. Instead of cultivating better products and services when faced with greater competition, firms in Russia would rather use bribes as means to develop their market shares. This has an important managerial implication because it means that multinationals entering an emerging market such as Russia, previously protected from competition, will certainly face the use of corruption from local firms.

Secondly, in line with other previous research, we assumed that the quality of institutional framework (law, law enforcement, quality of financial markets) would have a negative influence on the level of corruption. However, our data showed no relationship. The relationship between the quality of the institutional framework and the quality of the legal framework was positive but marginal with a low ( = 0.0362, p<.05). The relationship between the quality of the institutional framework and the quality of law enforcement was positive ( = 0.1682, p<.05). The relationship between the quality of the institutional framework and the quality of the financial market was positive and significant ( = 0.4195, p<.05). These results support our hypotheses H2b and H2c. However, the relationship between the quality of the institutional framework and the level of corruption was positive (= 0.1097, p<.05). The contribution to the R is
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very marginal at 5.33%. Therefore, Hypothesis 2 concerning the coercive isomorphism hypothesis is not supported. The institutional framework did not influence corruption in Russian firms. Therefore, coercive isomorphism is not a key factor to explain various levels of corruption in Russia. This is an interesting result because the institutional framework is very often presented as a major factor in fighting corruption (World Bank, 2000; Rodriguez et al., 2006). To understand this surprising result, we should keep in mind that the institutional framework was weak in Russia at the end of the 1990s. Thus, with a low level of implementation and above all a low level of recognition by the Russian population, the institutional framework had no effect on the will to adopt corrupted or non-corrupted behaviors. As matter of fact, the acceptance of an institutional framework is a socialization process in which a population will accept new regulations over a period of time. As any socialization process, the institutional framework acceptance has a certain inertia. The collapse of the Soviet Union was sudden and gave rise to a new institutional framework which was still not accepted nor even known at the end of the 1990s. Therefore, Russia suffered from a deficit of institutional trust (the level of trust in the people regarding the quality of the national institutions). For example, a survey at the end of the 1990s in Russia showed that 74% of people polled said they thought that corruption among national government officials was worse than under communism (Rose-Ackerman, 2001:413). Shock therapy was thus accompanied by a weakening of state control in Russia and confusion among the population about proper behavior in a context of increased freedom (Rose-Ackerman, 2001). Not only does the quality of the institutions need improvement, but also a populations trust in the quality of the institutions needs to be bolstered. Some studies has demonstrated that the higher the trust among its people, the lower the corruption (Adsera et al., 2000; Uslaner, 2004). La Porta explained the link between trust in the institutional framework and corruption when highlighting its importance in the cooperation between bureaucrats and citizens (1997). It is true that the role of beliefs about the prevalence of corruption should be taken into account in analyzing corruption (Rose-Ackerman, 2001). This suggests an interesting avenue for research concerning the necessary level of trust in institutions in order to aid them in reducing corruption levels.
19

Thirdly, the relationship between the level of unfair behaviour by competitors and the level of corruption was positive and significant (=0.1455, p<.05). Our data supports hypothesis 3 concerning mimetic isomorphism. Mimetic isomorphism is a strong explanation of the extent of corruption. Firms in Russia tend to imitate each others behavior. This is in line with the theory of influence on reference groups for corruption (Rose-Ackerman, 2002). There is an unfair endogenous behavior between enterprises in the same economic sector. For example, a new enterprise may follow the corrupted behaviors of its Russian competitors. There is a certain homogeneity in criminal practices. For corruption, we could say that in Moscow, it is necessary to do as the Moscovites. The importance of mimetism in the diffusion of corruption provides an explanation of the difficulty in fighting corruption within the Russia context at the end of the 1990s. If corruption is socially accepted and largely used by firms, it is difficult for ethical firms to compete with other corrupted organizations. Punishing one single corrupted firm was not sufficient to fight the trend, for all firms may imitate the nonethical practices of the competitors.

Fourthly, the relationship between the level of internationalisation and the level of corruption was negative and significant (= - 0.3148, p<.05). Our empirical data showed that the greater the investment of a multinational in a local Russian firm, the lower the corruption. Thus the hypothesis H4 concerning normative isomorphism is supported. If a multinational owns a significant stake of the capital of a local firm, the international headquarters will try to spread ethical norms to the local work force. This will decrease the likelihood of this local firm to practice corruption. Multinationals seemed to spread ethical behavior in their Russian subsidiaries. They enforced their normative ethical behavior within their local Russian firms. Multinationals could be key actors in the reduction of corrupted practices. This implies that if corruption is important in a country, non-corrupted multinationals may have some difficulties when competing with corrupted local firms. MNC may then decide to pull their local investments. This result is in line with research concerning the influence of corruption on FDI, Foreign Direct Investments.
20

Studies have showed that higher the rate of corruption, the lower the FDI (Smarzynska, Wei, 2000; Aizenman, Spiegel, 2003; Rodriguez et al., 2006).

Fifthly, our theoretical development leads us to predict that the more politicians and bureaucrats exercise control rights over firms, organizations may be less likely to adopt corrupted behavior. Our data shows a negative and significant relationship between the politicization of economic activity and the level of corruption (= - 0.1959, p<.05). H5 hypothesis concerning the link between the politicization of the economic activity and the level of corruption is supported. Our empirical data leads us to accept our hypothesis regarding the relationship between the politicization of economic activity and the level of corruption in Russia. Government intervention in a firms decision is a predictor of the decline in corruption within Russian firms. To develop an adequate and business-friendly environment, the Russian government may have to interfere in private firms functions. This politicization of the economy may be necessary in the first period of institutional building to lower the potential for corruption. As a matter of fact, there is a minimal amount of control necessary to regulate and control markets and institutions. In the first period of capitalism development and democratization in Russia, the intervention of government in economic activities may be necessary to spread and implement a correct institutional framework.

Conclusion Despite various important reforms instigated by leading international bodies, corruption is still rampant in Russia and this phenomenon undermines its economic development. Among the reasons explaining Russia corruption levels, a weak institutional framework is often described as an important factor. Based on neo-institutional literature, our research aimed to show the influence of organizational isomorphism on corruption in Russia. This type of research is difficult because the central concept of corruption is hidden by nature. Direct collection of data through interviews with 552 executives in Russia was used. A questionnaire was built with various statements linked to a quantitative scale for answers. This entitled us to use a quantitative method to analyze the collected information. The
21

PLS approach was selected to test our theoretical model. The developed model provides an integrated approach to the study of the relationship between corruption and organizational isomorphism. Our empirical data entitled us to test various theoretical hypotheses. We have tested various key hypotheses concerning the influence of organizational isomorphism on corruption in firms in Russia. Coercive isomorphism hypothesis is not supported by our data. The classical hypothesis is that the higher the quality of the institutional framework, the lower the corruption. However, firms were not influenced by their institutional environment in adopting corrupted behavior. The quality of the institutional framework in Russia (notably the quality of the legal framework, the quality of law enforcement and the quality of financial markets) did not impact firms decision to adopt corruption. Furthermore, we ascertained a positive relationship between the intensity of competition and the level of corruption. Our data show that the higher the competition, the higher the corruption. Competition level predicts the level of corruption. Competitive isomorphism on the matter of corruption is supported by our empirical data in Russia. Another explanation of corruption is mimetic isomorphism. If the competitors of a Russian firm have high levels of unfair practices, the firms are likely to adopt corrupted behavior. Competitors unfair behavior greatly predicts the level of corruption in Russia. Normative isomorphism hypothesis is also supported. Our empirical data shows that when the stake of a multinational in a subsidiary is greater, then the use of corruption in the subsidiary is lower. This is an interesting result in that multinationals seem to spread ethical behavior to their Russian subsidiaries. The greater the investment (in fact, participation in the capital of the subsidiary), then the lower the likelihood for a subsidiary to adopt corrupted behavior. Finally, the politicization of the economy influences the level of corruption in Russia. The more politicians and bureaucrats exercise control rights over firms, the less likely the organizations may choose to adopt corrupted behavior. To build a business-friendly
22

environment in Russia, a minimum of government intervention is necessary. The politicization of the economy may be necessary in the first period of institutional construction to reduce opportunities for corruption.

The limitations of our study are related largely due to our respondent sample. Despite interviews conducted in 552 firms in Russia, this research relies on one-on-one interviews in each firm. Only one executive was interviewed in each firm, with the assumption that one respondent could describe completely and accurately any hidden behavior such as corruption. However, this is quite common in prior research in the corruption field (Lancaster, Montinola, 2001). The prevalence of corruption and crime in business affairs in Russia has been generally recognized as a major concern, which undermines the countrys ability to further develop its economy. The actual rents of the energy sector and raw material activities have allowed Russia to be able to develop its economy. However, corruption is endemic and restrains the ability of Russia to achieve higher economic development. Our study also shows that firms are greatly influenced by the unfair behaviors of their competitors and multinationals in their choice of corrupted behavior when dealing with governments. Since uncorrupted human capital is the engine of economic development (Wilhem, 2002), it is important for Russia to find ways to reduce levels of corruption. New social institutions have to be built to reduce the amount of unlawful acts in the Russian society. However as Ryvkina noticed, a logic path is for Russia to organize a social and moral housecleaning, but the fact that a path is logical is not a guarantee that it will be taken (1998).

23

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Figure 1. Hypothesized model explaining the level of corruption in firms in Russia.

Quality of the Legal Framework
(+) H 2a (+)

Quality of the Financial Market

H 2c

Intervention of Government in Firm Activities

H 5 Politicization of Economic Activity

Quality of the institutional framework

H 2b (+)

H 2 Coercive Isomorphism (-)

(-)

Law Enforcement

Unfair Behaviors by competitors

H 3 Mimetic Isomorphism (+) H 1 Competitive (+) Isomorphism

Level of corruption

Intensity of competition

H 4 Normative Isomorphism (-)

Interrnationalization

34

Table 1. Description of the sample. Source: authors.

Description of the sample Number of respondents Capital city Other over 1 million inhabitants Between 250,000 and 1,000,000 inhabitants Between 50,000 and 249,999 inhabitants Below 50,000 inhabitants Total Very small firms: less than 9 employees) Small firms: 10-49) Medium firms: 50-199 employees) Large firms: 200+ employees) Total Agriculture, Farming, Fishing, Forestry Mining, Quarrying, Energy Manufacturing Building, Construction Trading, wholesale Retail Transports: air, land, sea) Others services: health, welfare, education Total Private companies State-owned firms Total Financial stake by a Foreign company No Financial stake by a Foreign company Total 87 114 118 98 135 552 65 147 241 126 552 125 4 139 64 86 79 26 29 552 527 25 552 37 515 552 16 21 21 18 24 100% 12 26 39 23 100% 23 1 25 12 15 14 5 5 100% 95 5 100% 7 93 100% % of questionnaires

35

Table 2. Example of questions for different concepts. Source: authors.

Concept Level of corruption Questions - How often do firms like yours nowadays need to make extra, unofficial payments to public officials to gain government contracts? - How often do firms like yours nowadays need to make extra, unofficial payments to public officials when dealing with customs / imports ? Intensity of competition - Please rate the influence of the pressure from domestic competitors on key decisions about your business. - Please rate the influence of the pressure from foreign competitors on key decisions about your business. - Can you tell me how problematic are policy instability / uncertainty for the operations and growth of your business? - Can you tell me how problematic are taxes and regulations for the operations and growth of your business? - Now, thinking about our countrys legal system, how often do you associate the following descriptions Fair and impartial with the court system in resolving business disputes? - Now, thinking about our countrys legal system, how often do you associate the following descriptions Quick with the court system in resolving business disputes? Law enforcement - Could you please rate the overall quality and efficiency of services delivered by the judiciary / courts? - Could you please rate the overall quality and efficiency of services delivered by the police? Quality of the financial market - Can you tell how problematic are the bank paperwork and bureaucracy for the operations and growth of your institution? - Can you tell how problematic is the lack access to long-term bank loans for the operations and growth of your institution? - Can you tell me how serious a problem are the following practices of your competitors for you firm? They do not pay duties or observe trade regulations - Can you tell me how serious a problem are the following practices of your competitors for you firm? They avoid labour taxes / regulations Politicization of economic activity - How often does the government intervene in the investment decision by your firm? - How often does the government intervene in the pricing decision by your firm?

Quality of the institutional framework Quality of legal framework

Unfair behavior by competitors

36

Table 3: Intercorrelations between the various variables. Source: authors.

Quality of Quality of Variable the legal framework Law enforceme nt the financial market Quality of the institution al framework Unfair behavior by competitor s Internation alization

Intensity of competitio n

Politicizati on of economic activity

Importanc e of corruption

Quality of the legal framework Law enforcement Quality of the financial market Quality of the institutional framework Unfair behavior by competitors Internationalization Intensity of competition Politicization of economic activity Importance of corruption

1.0000 0.3191 0.0563 1.0000 0.2776 1.0000

0.1135

0.2962

0.4683

1.0000

0.0003 0.0179 -0.0406 -0.0234 -0.0229

-0.1129 0.1798 -0.0309 0.1215 -0.1013

-0.3635 0.3274 -0.0884 0.1912 -0.1846

-0.4015 0.2368 -0.1521 0.1501 -0.0910

1.0000 -0.0180 0.1576 -0.1747 0.1810 1.0000 -0.0077 -0.2322 -0.2479 1.0000 -0.0144 0.2634 1.0000 -0.1354 1.0000

N = 552, All correlations are significant at P < 0.05.

37

Table 4: Description of variables. Source: authors.

Number of items

Construct

Hypotheses

Cronbachs

Level of corruption

0.8155

Intensity of competition

H1

0.7807

Unfair behavior

H2

0.8607

Internationalization Quality of the institutional framework Quality of the legal framework Law enforcement

H3 H4

1 10 0.7918

H4a

0.7960

H4b H4c

11

0.8221

Quality of the financial market Politicization of economic activity

0.7551

H5

0.7538

38

Table 5: Results of Partial Least Squares Analysis. Source: authors.

Contribution to R Path Coefficient t-value

Factor Quality of the institutional framework H2a Quality of the legal framework Law enforcement Quality of the financial market R

Correlation

0.2504

0.1135

1.64%

0.0362

0.9251

H2b

0.2962

19.89%

0.1682

4.1368

H2c

0.4683

78.46%

0.4195

10.8702

Level of corruption

0.1873

H1

Intensity of the competition Quality of the

0.2634

35.44%

0.2519

6.3660

H2

institutional framework

-0.0910

5.33%

0.1097

2.4574

H3 H4 H5

Unfair behavior by competitors Internationalization Politicization of economic activity

0.1810 -0.2479 -0.1354

14.06% 41.67% 14.17%

0.1455 -0.3148 -0.1959

3.3755 -7.5429 -4.7567

N = 552, P < 0.05

39