Corruption, South African Multinational Enterprisesand Institutions in Africa

John M. Luiz • Callum Stewart

Received: 28 February 2013 / Accepted: 25 August 2013

� Springer Science+Business Media Dordrecht 2013

Abstract We examine the responses of South African

multinational enterprises (MNEs) to corruption in African

markets in the context of institutional voids. Corruption is a

source of uncertainty and additional transactional costs for

MNEs and it necessitates a strategic response. The research

employs a qualitative study of a sample of MNEs with

experience in internationalising into Africa. The results

indicate that corruption in African markets is pervasive and

closely associated with the institutional voids in these

countries. MNEs see themselves as ‘institution takers’

responding to countries’ institutional makeup at the

organisational and individual level but fail to fully appre-

ciate their impact on institutions both positively and neg-

atively. Rather MNEs focus on strategic responses at the

organisational level to address corruption operationally in

the host country. We add to the existing literature by

providing a dynamic framework of the complex webs of

association between institutions, MNEs and corruption in

conditions of economic underdevelopment. The research

suggests that MNEs do not need to get caught in a vicious

cycle whereby they perpetuate corruption in conditions of

underdevelopment and institutional voids but instead can

contribute towards a virtuous cycle through which they

institutionalise ethical foundations.

Keywords Corruption � South African

multinational enterprises � Institutional voids � Africa

Introduction

According to the Transparency International’s (2012)

Corruption Perception Index, sub-Saharan Africa (SSA)

has a regional average corruption score of 3.3 of a maxi-

mum possible score of ten (with one being highly corrupt).

This shows the region to be amongst the most corrupt

worldwide with the average rank for SSA countries being

112 out of 176 captured in the survey. Corruption in any

transactional space is seen as an additional business cost,

which influences strategic decision-making. There is rela-

tively little research on how MNEs deal with corruption in

emerging markets specifically (Li 2009; Uhlenbruck et al.

2006). Thus, there is a shortfall in organisational evidence

to suggest how corruption should be addressed by MNEs

expanding into emerging and frontier markets, such as

those in Africa, against which MNEs can formulate or

evaluate strategy (Svensson 2005). Strategies employed to

overcome corruption and the costs of corruption effectively

are particularly important for MNEs given current forecasts

that much global economic growth will, in the future,

originate in emerging and frontier markets.

African markets represent particular challenges for

multinational enterprises not only because they are rela-

tively unexplored and thus represent somewhat of a ‘black

box’ phenomenon but also because they have weak insti-

tutional frameworks including poor regulatory systems,

flawed judiciaries and political systems still in the process

of consolidation. These institutional conditions, where the

rules of the game are still fluid, are thought to provide

settings ripe for corrupt behaviour as companies either

opportunistically try to exploit these weaknesses or out of

frustration succumb to pressure to ‘get things done’. There

is a surprising dearth of research on how the macro phe-

nomena of institutions affect the ethical behaviour of both

J. M. Luiz (&) � C. Stewart

Graduate School of Business, University of Cape Town,

Breakwater Campus, Portswood Road, Green Point,

Cape Town 8005, South Africa

e-mail: john.luiz@gsb.uct.ac.za

123

J Bus Ethics

DOI 10.1007/s10551-013-1878-9

individuals and organisations (Nielsen and Massa 2012)

which is our focus here. Furthermore, we add to the

existing literature by providing a dynamic framework

which examines the complex webs of association between

institutions, MNEs and corruption in conditions of eco-

nomic underdevelopment.

This paper develops an understanding of the contextual

significance of corruption for MNEs expanding into Afri-

can markets. The focus of this research is encapsulated in

the following research questions: (a) What influence do

institutions in Africa have on MNEs in terms of corrupt

behaviour? (b) What strategies do MNEs expanding into

Africa employ to reduce corruption in host countries?

(c) How do MNEs see their strategies impacting upon the

institutional framework of the host country? The paper is

structured as follows. Second section provides the literature

review. This is followed by a discussion of the research

methodology. Fourth section provides the results and dis-

cussion, whilst fifth section provides conclusion.

Literature Review

The Nature and Cost of Corruption

Corrupt activities are typically both transactional and

institutional and include interactions between governments,

institutions and private individuals. We define political

corruption to include the activities of public officials which

result in an abuse of public power for the purpose of per-

sonal gain on the part of the official (Spencer and Gomez

2011); and organisational corruption, as the abuse of power

that is organisational in nature and which results in the

conscious violation of ethical or legal rules of the organi-

sation for personal gain and possibly to the detriment of the

organisation (Hodgson and Jiang 2007). In developing

countries corruption is often perceived to be particularly

pervasive and manifests as an expectation by MNEs of the

solicitation of bribes in host countries (Cuervo-Cazurra

2008) and thus requires a strategic response by MNEs

before they invest. Uhlenbruck et al. (2006, p. 402) dem-

onstrate that firms adapt to the pressures of corruption via

short-term contracting and entry into joint ventures. They

find that the arbitrariness surrounding corrupt transactions

has a significant impact on firms’ decisions, in addition to

the overall level of corruption. Given that African markets

have been characterised as prone to high levels of cor-

ruption (Luiz 2009), it is likely that pervasive corruption

will be the most dominant form of corruption experienced

by MNEs expanding into Africa.

For African countries, already suffering from the effects

of low levels of economic development, the costs of cor-

ruption can be particularly devastating. Not only can it act

as a disincentive for foreign direct investment but it also

results in the unproductive allocation of scarce resources

and the under-provision of both public and private goods.

From an organisational perspective, Doh et al. (2003)

propose six types of direct costs that organisations incur as

a result of corruption when operating in foreign countries.

These include:

(a) The direct financial cost of bribes to government

officials.

(b) The cost of bureaucratic delays (from complying

with, not-complying with or being coerced into

complying with corrupt intentions of officials).

(c) The cost of efforts to avoid or circumvent corrupt

interactions.

(d) The cost of directly unproductive actions including

lobbying to overcome corrupt practices.

(e) The cost of the forced avoidance of institutions (such

as legal systems).

(f) The cost of deliberate or unintentional involvement

with organised crime.

The direct costs associated with corruption (a form of

informal tax) affect the strategic considerations of organi-

sations in different ways at different stages of the inter-

nationalisation process. Understanding host-country

corruption and developing strategies to manage it affects

host-country selection and entry mode, and consumes a

large amount of organisational resources (Rodriguez et al.

2005).

The costs incurred by MNEs are not restricted to oper-

ational and direct costs alone. Merely operating in a

country which is perceived to experience high levels of

corruption can have a reputational effect on an organisation

and influence company value or performance (Spencer and

Gomez 2011). A case in point is the large oil companies

operating in Nigeria which have suffered reputational

consequences as a result of operating in that milieu (Ag-

biboa 2012). The perception is that they must somehow be

complicit in perpetuating high levels of corruption if they

are able to thrive there. Where corruption is pervasive,

companies face an operational paradox that again involves

cost: either participate in corruption in host countries with

the attendant reputational risk and the direct cost of the act,

or sacrifice business opportunity (Spencer and Gomez

2011). The latter raises the issue of how organisations

should engage competitors who may or may not share their

vision for a corruption-free environment (Petkoski et al.

2009) and competitors who gain access to markets on the

basis of their corruption. Nichols (2009, p. 806) refers to

the assurance problem that corruption represents for busi-

nesses: if all actors abide by the rules and no businesses act

corruptly, then all will be better off. But if defection

occurs, then those who act corruptly will be better off than

J. M. Luiz, C. Stewart

123

those that abide by the rules and continue to eschew cor-

ruption. Various theories have been put forward for dealing

with this collection action problem including the Integra-

tive Social Contract Theory (ISCT) which provides a

normative theoretical framework with which to judge the

morality of global business activity through the collective

agreement on hypernorms and the C2 (combating corrup-

tion) principles (Johnsen 2009; Schwartz 2009). However,

where corruption is endemic as it is in many developing

countries, the practical application of these theories are

constrained. Nichols (2009, p. 806) warns ominously that

in a systematically corrupt system, ‘a business that does not

act corruptly may face extinction’.

Responses to Corruption

Firms entering less developed countries with weak insti-

tutions, prone towards corruption, are well advised to

develop formal strategies for dealing with corruption. The

ostrich effect of pretending it does not exist is not an option

and firms will be forced to confront it in almost every facet

of their business. Hemphill and Lillevik (2011,

pp. 222–223) explain Wieland’s (2009) conceptualisation

of how organisational values need to be disseminated

throughout an organisation via a ‘Values Management

System’ (VMS) to ensure ethical compliance at all organ-

isational levels. They reveal four major steps in the VMS.

The initial, foundational level provides the basis for the

company to foster a particular ethical culture ‘through the

use of codification: values, mission and vision, and a code

of ethics. The second step incorporates organization-wide

policies and procedures; the third step is to take these

policies and procedures and incorporate them into com-

prehensive programmes that deal with compliance and

audit; and the fourth and final step institutionalizes these

concepts by creating sanctioned offices and teams to ensure

that the ethical values of the organization are operational-

ized and enforced systemically throughout the entire firm

(Wieland 2009)’. Furthermore, they demonstrate that for

the Manifesto to be properly implemented, a strategic

human resource management plan must be created and

followed within the organisation so that the essence of the

Manifesto is disseminated throughout the firm. This

includes the process of selecting employees, training and

developing them in the ethical culture of the firm once they

are in, and using the performance management and com-

pensation tools to encourage and reinforce ethical behav-

iour. Evidence indicates that firms that have a written code

of ethics are less likely to find international bribery

acceptable and thus codifying these ethical frameworks are

part of the solution to international corruption (McKinney

and Moore 2007).

Corruption influences every aspect of the strategy of

internationalisation starting with entry into new countries.

Galang (2012) and Doh et al. (2003) refer to four general

organisational response strategies that are applicable to

entry-mode decision-making regarding corruption at an

operational level:

• The ‘avoid’ strategy involves deciding not to invest if

the perceived levels of corruption are too high and self-

regulation through internal policies and systems.

• The ‘alter’ strategy involves playing an active role in

driving both regulatory and institutional change to

combat corruption from within the host country.

Initiatives such as business group participation, public

education involvement, donations and other initiatives

aimed at gaining popular support are typical responses.

• The ‘ally’ strategy involves engaging in political

relationships, joint ventures, state ownership or corpo-

rate/social responsibility projects.

• The ‘accede’ strategy involves either an acceptance of

the bureaucratic process or capitulation to requests for

demand-side bribes.

An interesting omission from this set of responses is a

fifth category, namely ‘instigate’. The literature assumes

that corrupt environments emerge and then firms are faced

with accession, opposition or avoidance but not that firms

could actually be the primary instigators thereof and could

adopt this as a strategy. Extending the public choice rent-

seeking literature would imply that MNEs would be willing

to expend as much on corruption as they expect to gain in

surplus and the role of formal institutions would be to

prevent firms from pursuing such avenues. Firms have the

ability to influence institutions through their strategies both

positively and negatively and this is oft overlooked. They

are not neutral ‘institution takers’. We discuss this further

below.

Institutional Voids as a Cause of Corruption

Institutions represent the implicit or explicit rules that

increase the predictability of human behaviour in economic

activity (North 1984) and maximise wealth based on eco-

nomic interactions. Emerging markets are characterised by

a lack of predictability in economic activity relative to

developed markets (Khanna and Palepu 2010). Institutions

in emerging and frontier markets are not necessarily dys-

functional or absent, but they do lack the regulatory effect,

choice and transactional confidence of institutions as

described by North (1984). These institutional weaknesses

present substantial challenges to companies wishing to do

business in these markets (Tan 2009). Institutions originate

in social, economic, business, political and legal contexts

Corruption, MNEs and Institutions

123

(Peng et al. 2008) and given that they are ingrained in

economic activity, the effects of institutional voids are felt

by firms throughout their activity chains. MNEs entering a

host country with institutional strengths different to those

in their home country can be compromised by their lack of

understanding of the institutional weaknesses and how to

overcome them (Boddewyn and Doh 2011). MNEs can be

tempted to overcome these institutional voids, which delay

business processes and raise transaction costs of getting

things done, by engaging in unethical behaviour.

Indeed institutional voids in host countries are seen by

many as a primary cause of pervasive bureaucratic and

organisational corruption (Pajunen 2008). The institutional

view suggests that the prevalence of corruption can be

forecast based on an analysis of the strength of institutions

(Cuervo-Cazurra 2008; Doh et al. 2003). If institutional

voids exist this can result in governmental discretion and

control over resources without oversight and corruption. A

focus on improving governance and enhancing the

accountability of officials (Svensson 2005) is critical for

ensuring corruption is controlled, a role often played by

institutions. Where governmental discretionary power

(without oversight) and the operational requirements of

MNEs intersect in the absence of strong institutions, the

risk of corruption increases. Ineffective, politically orien-

tated institutions can result in poor regulation, excessive

government intervention in business operations and the

monopolistic provision of resources, all leading to an

increase in the incidence of corruption (Peyton and Belasen

2012).

Webs of Association: A Dynamic Framework

of Institutions, Organisations and Corruption

The costs of corruption are generally not sufficient to deter

organisations from attempting to exploit growing emerging

and frontier market opportunities. However, companies are

required to implement strategies that either negate the

effects of corruption or address its causes. MNEs may

choose to respond to institutional voids by either mitigating

their effect or remedying the voids themselves by influ-

encing the nature of the institutions (Khanna and Palepu

2010). Direct mitigation strategies are initially evident

during the process of market entry and inform the selection

of local partners and mode of entry. If the decision is taken

to enter an environment characterised by institutional

voids, a MNE may do so by replicating the business models

of local firms or adapting its business model to address the

costs of institutional voids (Khanna and Palepu 2010).

These mitigation strategies are distinguished from a subset

of influencing strategies which seek to affect the institu-

tional context through influence on the institutions them-

selves rather than mitigate the effects.

Much of the literature on international corruption is

embedded within a static framework assuming that MNEs

are neutral ‘institution takers’ responding to solicitation but

not that they themselves impact institutions. Figure 1

illustrates a dynamic framework of the interconnectedness

of institutions, MNEs and corruption in developing coun-

tries. It shows the complexity and the webs of association

at play within developing countries. Institutions in host

countries clearly have an impact on MNEs either positively

or negatively by raising or lowering the transaction costs of

doing business there. Firms then respond to these transac-

tion costs through their organisational strategies including

whether or not to engage in corrupt behaviours. A public

choice explanation would state that they will engage in

unethical behaviour as long as the marginal benefits out-

weigh the marginal costs. Where institutions are weak, the

chance of being caught and punished effectively is lower

and this raises the probability of corruption. Furthermore,

by engaging in corruption, MNEs further entrench host-

country corruption by institutionalising it as a norm and

thus reinforcing the cycle. Firms are in a position to

directly influence institutions either positively or nega-

tively and can thus be ‘institution makers’. For example, Li

et al. (2007) examine the influence that social institutions

have on organisational culture and design especially at the

MNE level and the influence that they in turn have on

social institutions. In developing countries, the problem is

compounded by low levels of economic development

which creates a vicious cycle of underdevelopment and

pathological behaviour. Low per capita incomes are asso-

ciated with weak institutions but there is a reverse associ-

ation too with bad institutions further entrenching low

levels of development (see Acemoglu et al. 2004 and Luiz

2009). Likewise, underdevelopment is an important cause

of corruption with poorly paid officials often being moti-

vated to accept or demand bribes because they are victims

of poverty (Beets 2005). Once more there is a reverse loop

with corruption reinforcing low levels of development as it

Fig. 1 Webs of association: a dynamic framework of institutions,

MNEs and corruption

J. M. Luiz, C. Stewart

123

shifts resources away from productive uses. The last loop

reflects the direct links between MNEs and per capita

incomes in host countries. Not only do low income levels

affect firms through obvious ways such as market oppor-

tunities (witness the recent literature on the bottom of the

pyramid solutions) but MNEs also have a reverse link. For

example, foreign direct investment can promote positive

(or indeed negative) social and economic consequences

through job creation, human capital and technology spill-

overs and the deepening of the private sector in host

countries (Bardy et al. 2012). We are thus left with a

complex web of associations in which MNEs are both

affected by and impact upon the institutional environment

and in which corruption is both a by-product and a cause of

this institutional milieu. MNEs can reinforce the vicious

cycle of underdevelopment, institutional weakness and

corruption or can, through their influence on institutions,

create a virtuous reinforcing cycle which promotes good

corporate policy and development.

In summary, responses with an institutional orientation

involve either an explicit or implicit intention to influence

institutions and address the institutional voids that cause or

enable corruption. The neo-corporatist view proposed by

Schmitter (2010) views organisations (MNEs in this case)

as participative bodies that interact politically to preserve

or enhance the achievement of business goals. This often

takes the form of direct political lobbying by a single

organisation (Hart 2010). In some cases, as is becoming

more prominent in the United States, organisations engage

in direct and integrated political participation in the for-

mation of business-backed political parties (Werner and

Wilson 2010). The co-evolution theory of MNEs in host

countries suggests that the presence of the MNE in a

country results in transference of the institutional sensi-

bilities of the firm to the host-country institutions. This

generally follows a period of adaptation on the part of the

firm entering the country during which aspects of the host-

country institutions are transferred to the firm (Cantwell

et al. 2010). This process is influenced by the business

strategy of the MNE and may result in disruptions to the

institutional framework and a realignment or strengthening

of institutions (Morgan 2012).

Research Methodology

This research employs an inductive, qualitative approach in

order to generate inferences from the sample. We use

cross-sectional design (a social survey) and this approach

was based on the collection of data relating to multiple

cases in order to detect patterns of association (Bryman and

Bell 2011). For the purpose of this research the semi-

structured interview format was used. This format ensures

that the core themes identified by the research questions

were addressed while allowing freedom for elaboration and

clarification.

The population of interest for this study is South African

MNEs that have entered markets in Africa. The sample

group selected included 15 MNEs from diverse industries,

and across different African markets. Table 1 provides a

summary of some of the key characteristics of the MNEs

sampled and this is further discussed in the next section. In

some cases more than one individual from a single MNE

was able to participate. The minimum requirement was that

they had established operations in African countries outside

of South Africa in the past 5 years. Within each company

the primary contact was an executive level employee with

strategic experience in internationalisation into Africa.

Credibility, transferability, dependability, and ease of

confirmation are some of the criteria used for evaluating

qualitative work (Bryman and Bell 2011). Credibility of

this research was assured through the integrity and scope of

the initial literature review, the robustness and integrity of

the data analysis phase, the size and sectoral diversity of

the sample group, and maintaining the integrity and inter-

pretation of the analysis (see Sect. ‘‘Results and discus-

sion’’). Transferability of the research questions the degree

to which the results and conclusions are applicable in other

contexts. This research was specific to corruption in the

African context and its findings may not be directly

transferable although are likely to be similar in other

emerging and frontier markets which exhibit institutional

voids. In order to gauge the transferability of the results to

the general population, the sample results were compared

to existing theoretical frameworks formulated in the cur-

rent research context. This process identified any sub-

stantial outlying themes which would indicate a notable

concern regarding transferability. An assessment of

dependability interrogates whether the results are applica-

ble at different points in time (Bryman and Bell 2011). The

nature of this research suggested that time is a non-critical

variable, and that the findings would be relevant to similar

institutional phases irrespective of time. Research is

deemed to exhibit a high level of confirmability if its

results clearly exclude the personal values and biases of the

researcher (Bryman and Bell 2011). In our research, we

developed a semi-structured interview schedule to ensure

an objective structure to the interviews. All the interviews

were conducted by the authors themselves between August

and November 2012 and the interviews were recorded

digitally and transcripts developed. The transcripts were

then subject to content analysis, coding and thematic cat-

egorisation of responses in a consistent manner as dis-

cussed in the next section.

Corruption, MNEs and Institutions

123

Results and Discussion

Characteristics of Respondents

The characteristics of respondents to this research are

shown in Table 1. Names of MNEs and respondents are not

given in order to maintain commitments to anonymity

given the sensitivity of the subject matter. The respondents

to this research include MNEs from the petrochemical,

retail, air transport, financial services, construction, tele-

communications, audit and advisory, and food and bever-

age sectors. Respondents from the retail sector hold

approximately 35 % of the South African formal food

market and have operations in 12 African countries. MNEs

from the petrochemical industry rank in the top 15 and top

five global petrochemical companies by revenue generated,

respectively, and have operations in more than 20 SSA

countries combined. Respondents from the financial ser-

vices and insurance sectors account for over 50 % of South

African market share by customer base and have operations

in more than 13 individual African countries. In addition,

the respondent group includes a MNE from the air trans-

port industry that is amongst the largest airlines in Africa,

one of the largest African construction firms, one of the top

three telecommunications firms, and the African division of

one of the world’s largest food and beverage firms by

revenue. The African market sub-divisions of two of the

five largest audit and advisory firms are also represented.

Uncertainty, Institutional Voids and Corruption

in Africa

In general, the responses of participants in this research

identified uncertainty as a substantial characteristic of

operating in African markets. This sense of uncertainty was

identified by the majority as the defining feature of doing

business in Africa in comparison to developed markets and

that the institutional milieu was a key driver of this. MNEs

indicated that a comparatively unfavourable social, eco-

nomic or political environment would not necessarily deter

investment provided these factors were consistent and

predictable (see Luiz and Charalambous 2009; Luiz and

Stephan 2012). They argued that unpredictability resulted

in higher transaction costs because it made it tough to plan.

Respondents stated that unresolved uncertainty could result

in the decision to delay or avoid investment in an emerging

and frontier market. One respondent noted that ‘businesses

hate uncertainty… if we know what we are dealing with it,

we can make informed decisions and if it makes sense we

will stay and if it doesn’t we will go’ (MNE12). The multi-

faceted character of the uncertainties faced by MNEs are

summarised thematically in Table 2 with the frequency

count of responses alongside. General country governance

and the efficiency of policy in facilitating business were

identified as major challenges in the African context. In

general, MNEs criticised rampant bureaucracy and it was

identified as ‘the biggest challenge that anyone faces in

Table 1 Characteristics of

respondents

SM senior manager, MD

managing director1 Numbers reflect revenue from

2011 year-end financial

statements except for finance

and insurance where total

income net of interest or claim-

related expenses (prior to

operating expenses) is used.

Currency conversions using

exchange rate on day of

reporting2 Non-profit organisation

providing advisory services in

risk and corruption. The NPO

consults to over 100 South

African, JSE listed corporate

members and carries out

training on their behalf in

African countries

MNE Respondent role African

operations

(# countries)

Industry Group revenue

($million)1

MNE1 SM: strategy 6 Petrochemical 375,517

MNE2 Director: strategy 8 Retail 114

MNE3 SM: logistics 8 Retail 7,259

MNE4a MD: African operations 6 Retail 7,731

MNE4b Director: compliance

MNE5 Director: operations 19 Air transport 3,102

MNE6 SM: business development 19 Petrochemical 70,115

MNE7 Director: corporate affairs 5 Financial services 15,119

MNE8a SM: Africa 5 Financial services 3,128

MNE8b Director: emerging markets

MNE9 SM: African investment 9 Financial services 5,004

MNE10a Director: risk 8 Construction 1,060

MNE10b MD: operations (Africa)

MNE11 MD: operations (Africa) 4 Telecommunications 8,701

MNE12 Director: African investment 24 Audit and advisory 22,900

MNE13 Director: marketing (Africa) 10 Food and beverage 31,388

MNE14 Director: forensics 27 Audit and advisory 31,510

MNE15 Director: risk 8 Advisory 2

J. M. Luiz, C. Stewart

123

Africa’ (MNE2) and another as: ‘….quite a hindrance to

business (that) can … make you lose your competitive

advantage’ (MNE14). Bureaucracy was identified as a

cause of delays as a result of complexity and uncertainty. It

was further suggested by some that government bureau-

cracy is an instigator of corruption in African markets.

Respondents suggested that the delays associated with

bureaucracy incentivise MNEs to consider corruption as a

means to expedite processes and reduce the costs of delays.

Perceptions of the Prevalence of Corruption

The predominant sentiment expressed by respondents

confirmed perceptions of high levels of pervasive corrup-

tion in African markets. Respondents used words and

phrases such as ‘institutionalised’, ‘prevalent’, ‘very real’,

‘rife’, ‘systemic’, ‘institutionalised’, ‘entrenched’ and

‘endemic’ to describe their perceptions of African market

corruption. A respondent noted: ‘You do get the request for

facilitation payments, no question about it, they will come

up and if you want this process to go quickly and smoothly

then you bring along the brown paper envelope’ (MNE1).

African markets are characterised by extended time-

frames—everything takes longer—and this adds to the

costs and to the incentive to engage in bribery to speed

matters up. For example, regulatory and compliance pro-

cesses, also considered laborious and bureaucratic, are

further fraught with corruption. Respondents suggested that

there is an increase in facilitation requests as complexity of

the project or investment increases. It was insinuated that

some MNEs cater for predictability of corruption by

including funding streams in internationalisation and pro-

jects to pay for facilitation requests: ‘I have seen a lot of

guys in business just factor it into their income statement

… they put it into their sundry expenses outright before

they even go out there’ (MNE9). This type of financial

planning would indicate high levels of predictable and

pervasive corruption.

Pervasiveness of corruption in Africa means that MNEs

often believe that they have no recourse when corrupt

activities are initiated by private citizens or government

officials in host countries. The perception of MNEs in this

research suggested that corruption in government institu-

tions is the norm and that reporting and oversight bodies are,

in themselves, corrupt. This sentiment was expressed by a

respondent regarding experiences of low-level corruption in

an African country: ‘So generally it is not as if one or two

officials are corrupt and then more senior people are not and

you can actually approach them … generally they’ve got this

way (corruption) that they do things’ (MNE10a). Thus,

MNEs do not have confidence in the reporting of solicitation

of bribes to the superiors of the government officials

involved as these superiors are believed to be equally prone

to corruption and likely to support it directly or indirectly.

The pervasive nature of corruption in Africa is evident in its

prevalence in a variety of government controlled institutions

such as policing services for example. MNEs related

accounts of how the solicitation of bribes by the police ser-

vices in many African countries are increasingly manifesting

as acts of extortion. Respondents believe that police officials

frequently take advantage of the lack of familiarity of local

laws on the part of foreigners to garner extra payments. This

includes the threat of detention of foreigners on false or

exaggerated charges.

The results show that most MNEs with experience of

operating in Africa perceived corruption to be so wide-

spread as to be almost unavoidable. As one respondent

concluded: ‘… it is reached such a level of ‘‘that’s the way

everything is done’’ that no-one even sees the wrong with

that anymore’ (MNE5). This links in with the literature on

the rationalisation of corruption (Moore 2008; Zyglidopo-

ulos et al. 2008) which argues that individuals attempt to

justify their corrupt deeds and morally disengage by

arguing that it is unavoidable or victimless. By maintaining

that African host countries are rife with corruption and that

this is the norm for doing business in this environment, it

‘frees’ individuals and MNEs from culpability. This may

Table 2 Uncertainty characteristics in African markets

Considerations Frequency

count

Factors

Legal systems 10 General knowledge of local law

and variation from home-

country law

Uncertain interpretation and

transparency

Enforceability of contracts

Legislated labour practices

Commercial law

Regulatory

compliance

8 Regulatory immaturity

Regulatory complexity

Regulatory bureaucracy

Culture and

language

6 Diversity and lack of

intermediary institutions

Cultural sensitivity

Country-specific

information

4 Little practically useful

information in public domain

Little sharing of information

between MNEs

Ineffective host-country

institutions

Politics, political

stability and

governance

4 Political and economic

conditions

Political interference

Government bureaucracy

Corruption, MNEs and Institutions

123

then result in overcompensation with MNEs then engaging

in more and more serious forms of corruption by over-

rationalising, resulting in further escalation and in the

additional institutionalisation of corruption. An interesting

dimension that became apparent from the interviews with

these MNEs is their lack of an ‘inner mirror’ concerning

their complicity in perpetuating this cycle of corruption.

They saw themselves as victims of poor institutions that

fostered corruption rather than as contributors to this phe-

nomenon. Going back to our Fig. 1 it is clear that they see

the direction of causality being from the institutional

environment to MNEs having to consider corruption as a

means of doing business because there are no alternatives

within this setup. But they do not reflect on the possibility

of a feedback loop that they are institutionalising corrup-

tion and that this reinforces a vicious cycle. One respon-

dent (MNE6) did hint at an understanding of this by saying:

‘entities are coming in and are amenable to these facilita-

tions that lead to corruption and then because they’ve done

it once, they go into another market and they do the same

thing and then it becomes almost like part of their own

culture to say whenever we go to emerging markets we pay

facilitation fees and those facilitation fees are actually

corrupting the officials in those emerging markets’.

Causes of Corruption

The relationship between corruption and institutions is

important in understanding the nature of responses to

corruption by MNEs. The main themes which emerged

from the respondents as to the causes of corruption in

African markets are discussed below and show a strong

perception that the institutional framework is a key driver

of corruption. The frequency with which factors were

mentioned by respondents is provided in brackets.

Inefficient Regulations and Legal Systems (Ten Respon-

ses) The major perceived cause of corruption in African

markets was related to the systems and procedures that

govern these markets. Respondents noted that in many

cases regulations or procedures were absent or unclear.

This results in opportunistic actions to capitalise on the

confusion created. ‘Grey areas’ are exploited by the

unscrupulous where, as one respondent noted: ‘…typically

someone is actually looking for some fee’ (MNE8a). In the

absence of a clear and enforced formal set of rules and

regulations, economies often operate under informal

frameworks. One respondent called these: ‘…a set of pri-

vate rules (that) they’re kind of making up as they go’

(MNE7). Informal economic and regulatory institutions

evolve to fill gaps in formal institutions. In many cases, this

results in corruption and an increase in the transactional

costs of doing business.

With regard to voids in the legal or judicial frameworks, a

respondent highlighted that inefficient legal systems can

result in substantial business delays which open the door to

corrupt activities. The respondent explained that in many tax

disputes the legal resolution could exceed 3 years and cost a

MNE a substantial amount of money. During this period of

time, the respondent noted that there are often numerous

attempts by officials to solicit bribes to expedite the process.

In reference to an actual experience of this, the respondent

said: ‘(There were) many people making an offer to make it

go away, including the officials in the Finance Minister’s

office…’ (MNE7). The incident being referred to was, in the

opinion of the respondent, the result of a blatant system

failure causing proceedings to be initiated unnecessarily.

Thus inefficient systems can incentivise both the initiation

and acceptance of corrupt transactions. Respondents indi-

cated that the type of uncertainty relating to inadequately

defined systems is common in the tax systems of Africa as

compared to those in developed markets. A respondent noted

that: ‘The issue that you have in many of these other (Afri-

can) countries is that the tax laws are so generic … with so

little guidance as to how to interpret (them), and the

authorities abuse that…’ (MNE10a). Respondents directly

attributed system inefficiency to institutions and corruption:

‘And, I suppose, if you had to … say ‘‘Where has corruption

gone out of control?’’—it is probably where institutions have

broken down or didn’t exist’ (MNE12). This suggests that

regulatory and system failures are indicative of institutional

weakness and related to corruption.

Failures in National Governance (Seven Responses)

Related to the first factor as to the causes of corruption

were the perceived failures in government. These failures

include direct missteps in addressing corruption and the

indirect tolerance of corruption on the part of governments

in Africa. Institutional failure and the eventual institu-

tionalisation of corruption were attributed, by respondents,

to governance in Africa. A respondent highlighted the

discretionary powers of government in saying: ‘Govern-

ment can put all sorts of (obstacles) in your way. Around

routes and market, availability, size, you know, I’m trying

to say this subtly but you know money passes hands in very

different ways’ (MNE13). Thus, the ability for government

to restrict economic activity through policy is central to

views expressed by respondents of the power they hold

over MNEs.

Governments are often the direct beneficiaries of cor-

ruption and are thus not incentivised to address it.

Respondents indicated that the prevalence of corruption in

government is dependant on the anti-corruption stance of

senior officials and ministers. Where officials and ministers

were even rumoured to be involved in corrupt activities it

was more likely that junior officials would engage in or

J. M. Luiz, C. Stewart

123

initiate corrupt transactions (MNE10a). Respondents

expressed a mixed sense of whether the problems of gov-

ernment failure relating to corruption lie in government

incompetence and its inability to enact anti-corruption

policies or whether there is a conscious lack of political

will in favour of personal gain. Some respondents believed

the latter to be true but others believed it was an imple-

mentation challenge through cascading levels of govern-

ment hampered by extreme bureaucracy (MNE10a). While

public office is not seen as a lucrative career through direct

remuneration in many African countries, there is a sense

that there are many informal opportunities to make money

and enrich oneself as a public servant. As noted by a

respondent regarding African public service: ‘Young peo-

ple want to go into government because they see it as being

a place where they can make quick money’ (MNE11).

Low Levels of Income (Eight Responses) Relatively lev-

els of income were widely identified by respondents as a

contributor to demand-side initiation of corruption—this is

in line with the work of Agbiboa (2012) and Beets (2005).

Where supplementing formal income with informal income

from corruption becomes a norm for a period of time,

people become dependent on informal income: ‘… once

you hit dependency they will find a way to ensure continuity

(of corruption)’ (MNE3). Therefore, corruption in a low

income environment left unchecked is likely to encourage

further acts of corruption in an ongoing cycle. Respondents

noted that: ‘…people live in abject poverty and so they see

it as a justifiable way of improving their lot in life’ (MNE2).

This sense of justifiable supplementation may even be

indirectly supported by governments in acknowledgment of

low levels of pay and to prevent having to act on this. This

view was expressed by a respondent who said: ‘So I think to

a large extent their superiors also turn a blind eye because

they know they are not paying them sufficiently, so in their

mind if you need to make up your income by doing stuff like

this (corruption) they … almost silently approve of it’

(MNE10a). Government officials who have institutional

powers to approve or reject potentially critical business

processes (such as permits, customs or tax) in combination

with low levels of personal remuneration are incentivised to

leverage these powers in exchange for personal gain. As

noted by a respondent: ‘…where corruption tends to

(manifest) is when you are (have) a civil servant who is …fairly lowly skilled and lowly remunerated, and the job has

a high degree of status and influence on …a very big eco-

nomic outcome…’ (MNE7).

Supply-Driven, Profit Motive Corruption (Five

Responses) African markets are perceived by many

MNEs to be sources of ‘a windfall or a quick win’ (MNE1)

in comparison to developed markets which are facing

increasingly low margins and high levels of competition.

Attempts to capitalise on African markets result in com-

petition between MNEs and increasing pressure to out-

perform each other. This pressure can lead to consideration

of non-standard operational practices including exposure to

possible facilitation arrangements to gain an advantage in a

complex environment. This confirms the view of Argan-

dona (2005) that the use of facilitating payments is very

widespread in a large number of developing counties and

represents a slippery slope to more serious forms of cor-

ruption. The view of Africa as fundamentally corrupt leads

some MNEs to accept corruption as a transactional

necessity leading to supply-side corruption becoming a

culture of the MNE when doing business in emerging

markets. Thus, MNEs adopt a negative culture of ratio-

nalisation that supports a cycle of ongoing corruption as a

normal course of doing business. This increases initial

costs but eventually translates into market share, profit and

growth because of faster market entry. MNEs are thus

faced with the decision to either absorb the costs of market

inefficiencies and wait out delays at the risk of losing

market share, or initiate and accede to these bribes

(MNE12). Respondents acknowledge that in general terms

supply-driven corruption is largely initiated through

subsidiaries or local partners rather than MNEs in order to

distance MNEs from the negative impacts of the corruption

(MNE7).

Ineffective Policing and Oversight (Six Responses) Gov-

ernments play a crucial role in establishing and maintaining

the institutions that regulate and police the behaviour of

MNEs. Respondents criticised policing and oversight

institutions in Africa for being ineffective at best. The

result is that risk associated with participating in corruption

is reduced as participants are unlikely to be caught. As the

risk of detection and prosecution decreases so does the

overall perceived cost of corruption to the MNE (see Jeong

and Weiner 2012; Osuji 2011; Karnani 2007). Further, the

sentences imposed when prosecution for corruption is

successful are often very low and not individually orien-

tated. Respondents from the financial services industry

suggested that this highly regulated industry is prone to

corruption because of the sophistication of the instruments

MNEs employ and the inability of regulators to keep up

with these instruments and as a result ‘they (regulators and

the police) probably won’t detect it’ (MNE8a). This is

made worse by the fact that often those assigned to carry

out oversight functions are themselves acting in a corrupt

manner. Thus weaknesses in institutions and oversight

lower the risk that participants face.

Conflicts of Interest (3 respondents) Respondents indi-

cated that conflicts of interest are not uncommon in Africa.

Corruption, MNEs and Institutions

123

Examples mentioned included Zimbabwe, Angola, Malawi

and Mozambique where governments include numerous

members of the same prominent family appointed under

questionable motivation. One of the more conspicuous

examples of this is evident in Angola where, it is reported,

that members of the president’s family control state-

enterprises in television, communications, and most

recently the sovereign wealth fund of the country. Alle-

gations of nepotism and corruption extend to tender-rig-

ging and influence in the appointment of key public

positions. Furthermore, many African markets were iden-

tified by respondents as being characterised by the

indemnification of individuals from the consequences of

corruption based on political status or relations. As noted

by a respondent: ‘(the) courts and the judiciary turn a blind

eye to politically connected individuals (in Africa)’

(MNE9).

In summary, the causes of corruption as identified by the

respondents fit neatly into the dynamic framework we

proposed earlier in Fig. 1 of the webs of association

between institutions, MNEs and corruption. MNEs

acknowledged the role of weak institutions in African host

countries in perpetuating corruption. However, they also

demonstrated an understanding of the impact of low levels

of economic development on the institutional environment

which perpetuates corruption. There was limited recogni-

tion of the supply-driven motive from MNEs although this

behaviour was still largely blamed on institutional push

factors.

The Strategic Responses of MNEs to Corruption

Participants in this research suggested a number of com-

mon strategic responses of MNEs to corruption in host

countries. These responses are described below and tabu-

lated in Table 3 (frequency count provided in brackets) and

are discussed individually in the context of the four typical

categories of responses to corruption (avoid, alter, ally and

accede) as proposed by Galang (2012) and Doh et al.

(2003).

Corporate Anti-corruption Policy (14 responses)

The predominant strategic response to corruption by MNEs

is corporate anti-corruption policy and establishing a rep-

utation for non-participation with regards to corruption.

Hess (2009) has, as his starting point for combating cor-

ruption, the importance of an approach which encourages

corporations to implement effective compliance and ethics

programmes and to disclose such information to all

stakeholders. One of our respondents emphasised the view

that the MNE he worked for made it standard practice to

outline the organisation’s policy regarding corruption and

ethics in introductory communications with the govern-

ment of potential host countries. Said the respondent:

We, upfront, write a formal letter to Government and

to all the authorities that we deal with to express our

interest in the country, and it is always supported by

the way we will transact. So we will be portrayed as a

model corporate citizen and there will be a high

ethical standard (MNE3).

Another respondent went even further and maintained

that they insist that all their suppliers sign up to a similar

ethical code if they want to do business with them:

I would say that the starting point is that a responsible

multinational investing in Africa must say I will not

tolerate it (corruption), I won’t enter into it, and I go

in with my eyes open and I put in all the safeguards

and risk mitigations …. So I think that’s the first step.

Then I influence or alter by saying right, I now expect

all my suppliers to sign up to the same standards and

I’m going to audit you or do diligence on you or

investigate you so if you want to do business with me,

you’ve got to show me open cards that you are

playing by the same rules (MNE12).

Other respondents supported this strategy saying that

such an approach effectively restricted attempts by gov-

ernment to initiate corruption (MNE4). This strategy is

dependent on the ability of MNEs to adhere to their policy

under all circumstances with regards to corruption and

clearly establish that any attempts at corruption would be

viewed as unethical and unusual for the MNE (MNE5). As

noted by a respondent: ‘…once you pay a bribe you are

down that road and they know that you are a soft target’

(MNE2). Involvement in corruption was perceived by

respondents to be a destructive cycle that was difficult to

exit: ‘… we know that when we enter a new market we are

going to have challenges (including corruption) and we just

work through them until they realise they can’t make

Table 3 General strategic responses to corruption

Strategic response Frequency

count

Categorisation

Corporate anti-corruption

policy and processes

14 Avoid

Delay market entry or exit 13 Avoid

Engage in host-country

partnerships

11 Ally

Legal and regulatory

compliance

6 Avoid

Institutional influence 4 Alter

Participate in business

groups

3 Alter/ally

J. M. Luiz, C. Stewart

123

money out of you. Then they leave you alone and they hit

other softer targets’ (MNE5).

In addition to establishing reputational integrity

respondents suggested that MNEs reinforce their strategies

operationally by ensuring that the zero-tolerance policy

extends to employees. In some cases, this involves disci-

plining employees involved in corrupt activities to set the

example. Corporate anti-corruption policies adopted by

MNEs include clear guidelines for employees that rein-

force the corporate policy by restricting any interactions

that could be seen as in conflict. This is in line with

Hemphill and Lillevik (2011) who emphasise the role of

implementing a moral values foundation as part of a

comprehensive human resources performance system

within MNEs. Respondents indicated that anti-corruption

policy could dictate the types of social interactions per-

missible between employees and hosts, including accept-

able gift exchanges (MNE7). This strategy is intended to

reduce ambiguity, address complexity as a result of host-

country norms and establish both an internal and external

standard with regards to corruption.

Delay Market Entry or Exit (13 responses)

Faced with unacceptable levels of corruption prior to mar-

ket entry, MNEs indicated that they might decide not to

enter the market at all. The case of Angola was used as an

example: ‘it is a massive market waiting to happen, (but) we

are not going to set foot in there. … If you are dealing with

those kind of people (government) all the time, you are

going to find yourself in some sort of political incident

which then tarnishes the brand’ (MNE9). If corruption was

realised to be unacceptable after market entry this could

lead MNEs to exit the market prematurely. The strategy to

delay market entry or terminate operations is often adopted

in relation to countries where prevailing laws or regulations

are believed to increase chances of corruption such as where

it mandates local or direct government ownership.

Respondents expressed the belief that government owner-

ship contributes to corruption through interference, conflicts

of interest and irregularities in contract awards. One

respondent spoke of a case where the president of the

country attempted to solicit a bribe and they realised that

this is a county that they just cannot do business in (MNE7).

Host-Country Partnerships (11 responses)

Respondents indicated that host-country partnerships are of

value to MNEs for a number of reasons but particularly

because they provide local insight into the legal and reg-

ulatory frameworks of the host country. Local partners also

contribute to reputational recognition and often provide

regulatory compliance. These partners have the well-

established relationships and associations necessary to

expedite potentially time-consuming processes facing

MNEs. A respondent clarified the role of local partners by

proposing that they serve as a guide through the legal

complexities in a host country. Another respondent hinted

at a more sinister function in that these local partners are

politically connected and can gain favour as a result:

‘(local partners) help you through the legal process. He (the

partner) knows somebody, knows the president … can

advance the process…’ (MNE7). Put simply, local partners

‘smooth the way’ for MNEs (MNE7) by identifying and

managing the many institutional voids they may face. But

this same MNE warned that the danger of relying on the

political connections of local partners is that the favour can

be revoked just as quickly when the political climate

changes which can be often in unstable African countries.

It was noted that there is a risk in using local partners

where corruption is known to be rife. One respondent

warned against the ‘outsourcing of corruption’ (MNE15)

where local partnerships allow MNEs to maintain a sem-

blance of innocence while benefiting indirectly from the

corruption of the local partner. Respondents suggested that

many MNEs use clearing agents, for example, to expedite

the process of clearing containers through customs

(MNE15). MNEs may distance themselves from the

methods that these agents use to achieve fast clearance

times because they may involve corrupt transactions.

Respondents suggested a growing awareness of this phe-

nomenon and that MNEs are coming under more and more

pressure to prevent corruption across their entire supply

chains, including partners and agents. This means that

MNEs are focusing a great deal on verifying the credentials

and auditing the actions of clearing agents (MNE2) rather

than assuming a shared policy rejecting corruption. In

many cases, the levels of corporate governance in Africa

mean that potential partners do not operate at the same

standard of governance as MNEs (MNE10a). A respondent

stated that in his experience some of the local partners his

company worked with had very low corporate governance

requirements. He put it this way:

(Local partners are) well-connected and I think a lot

of the stuff that they get done, they get done by

bribery. So they know someone and make a payment

to this person and that person and therefore they

quickly get stuff done….They often place pressure on

us to follow the same route if something needs to be

done (MNE10a).

Thus the selection of an appropriate partner is a critical

strategic factor in achieving the desired benefit of entering

into local partnerships. Partners can overcome institutional

voids and provide legal isolation from corruption through

reputational shield and institutional guidance.

Corruption, MNEs and Institutions

123

Business Groups (Three responses)

Business groups were seen by respondents to be a useful

way to pool the resources of businesses in support of a

common goal. Often this includes approaching govern-

ments and regulators on a united front for a common good.

This collective approach was well illustrated by a respon-

dent who related a Nigerian example in which MNEs

operating in the country formed a business interest group to

safeguard business brands and reputation from corruption.

The businesses recognised that they often shared suppliers

or service providers, and so used the group to establish a set

of ethical practices that they agreed to apply uniformly

within their businesses and supply chains. This ‘Fraud

Awareness Group’ was able to influence the institutional

environment to reduce the negative impacts of fraud and

corruption (MNE12).

Although business interest groups were felt to provide

some degree of access to governments and regulators,

respondents felt that in general these groups were not a

very effective strategy for addressing corruption. Their

perceived value was that they allow MNEs to leverage

market power in an environment where they often have

very little individually and thereby ‘create a broader culture

through collective action’ (MNE14). This culture includes

one of anti-corruption that is shared by MNEs who share

suppliers or local partners. In this way MNEs can expect

the same behaviour from multiple suppliers or service

providers. The participation in business groups is identified

by Galang (2012) as an ‘alter’ strategy against corruption

as it results in regulatory influence and institutional

development. However, while respondents identified

institutional influence as a benefit of business group par-

ticipation, many proposed that the more important benefit

is in opportunities to pool industry knowledge. This is more

consistent with the ‘ally’ strategy and hence this is iden-

tified as a dual ‘alter’/‘ally’ strategy.

Institutional Influence (Four responses)

Institutional influence in response to corruption did not

emerge as a major theme in strategic responses of MNEs to

corruption in Africa. Respondents felt that the ability of

MNEs to substantially alter host-country institutions was

limited and subject largely to the degree of maturity of the

market, the scale of the MNE and existing support within

the institutional framework (MNE6). Another argued that

MNE influence was not widespread and that it was up to

foreign governments, donor agencies, the World Bank and

IMF to push through institutional changes promoting good

governance as lending conditions (MNE8). Thus while

respondents indicated considerable interest in institutional

influence as a strategy to reduce corruption in host

countries, they felt that from experience MNEs can only

ineffectively alter or influence institutions. However, there

is evidence to suggest that MNEs exert institutional influ-

ence in less direct ways. Respondents admitted that the

introduction of corporate policy and policy regarding the

behaviour of suppliers, for example, influences the insti-

tutional framework in host countries but underplayed their

own impact.

The strategies identified by MNEs as responses to cor-

ruption (Table 3) broadly fall into the established catego-

ries as proposed by Galang (2012) and Doh et al. (2003).

These strategies are largely of the ‘avoid’ type with the

‘alter’ or ‘ally’ strategies proposed by respondents to a

lesser degree. Interestingly, there was some limited

acknowledgement of corruption ‘instigation’ by MNEs to

take advantage of African weak institutions but this was

always presented as some ‘other’ MNE:

My experience is that European countries and com-

panies have actually been the instigators, they are not

innocent. They have encouraged corrupt relationships

over many years and have done it through subsidiary

entities (MNE7).

MNEs appear to favour direct corporate anti-corruption

strategies over institutional influence in strategic responses

to corruption in Africa. But they recognise that this is a

short-term solution and in the long-term MNEs would

prefer to see the eradication of institutional voids for

general ease of doing business and to reduce the opportu-

nities for corruption to occur. However, the respondents

believed that they had limited powers to influence the

institutional makeup in host countries. This suggests that

MNEs in African markets are not optimised for institu-

tional influence. Referring back to Fig. 1, their focus is on

the impact of institutions on their operations rather than the

reverse feedback onto the institutional environment.

Centralised Versus Decentralised Approaches

to Corruption

A centralised and uncompromising anti-corruption policy is

pivotal to the strategy of many MNEs in establishing a zero-

tolerance approach to corruption in host countries.

Respondents indicated that MNEs generally use a standard

policy and approach to anti-corruption with little room for

host-country variations of interpretation so as to reduce

ambiguity. They insisted that a standard, centrally-set anti-

corruption policy was the most effective means of ensuring

low levels of host-country corruption. As one respondent

said: ‘I think if you have got ethics … you should wear it on

your sleeve and not just … practice it … at head office’

(MNE6). Another said ‘… most of our businesses are lead by

local people, but they (are) people that subscribe to the same

J. M. Luiz, C. Stewart

123

values and you have to have the same processes, the same

standards, the same level of zero tolerance for that kind of

stuff’ (MNE12). Thus, the predominant view expressed by

respondents was that MNEs need to incorporate policy into

the local context without compromise or deviation. In many

cases, these standards are a product of global or home-

country’s rules of governance, such as Sarbanes–Oxley or

the King III governance (a South African code) rules

(MNE11). These allow no flexibility or room for interpre-

tation across different operational locations. These types of

policies are consistent with the strategy of avoidance pre-

viously established as a means of combating corruption.

This assumes a universal understanding of corruption and

that the standards of developed markets are applicable to

developing markets. Respondents also noted the growing

belief that ethical standards should apply equally to suppli-

ers and partners in host countries (MNE15).

However, all respondents mentioned the importance of

considering local norms. For example, in some countries

acceptance of hospitality is a matter of respect and thus

influences transactions. In these countries, the boundaries

of acceptable behaviour would necessarily have to include

stringent declaration and disclosure requirements. One

respondent suggested that the lack of understanding of

African markets led to misconceptions where business

norms were confused for corrupt activities:

‘I think … the people in a country are the best people to

make decisions about what is required. If it is, for argu-

ment’s sake, something that is part of the day-to-day

business…one man’s corruption is another man’s way of

doing business’ (MNE6).

A particularly interesting example of varying behav-

ioural norms was given by one respondent to highlight the

real complexities of doing business in developing countries

that are perceived to be more corrupt. The respondent

explained that some senior managers made it clear—

despite corporate policy that allows for host-country part-

ners to provide entertainment to a certain value—that

managers should always pay their own way. The intention

was to establish an indisputable reputation for non-partic-

ipation in corrupt transactions by refusing to accept any

generosity. The same managers, however, would not

behave in this way when visiting developed European

markets where the threat of corruption was perceived to be

less. The managers in this MNE had decided that opera-

tional responses should be stricter than strategic responses

to clearly isolate the MNE from corruption (MNE12). The

systemic nature of corruption in some African host coun-

tries has therefore resulted in what some would argue is an

‘over-shooting’ of corporate behaviour so as to limit the

possibility of impropriety or the perception thereof. This is

also seen as a way of reinforcing the signal to the host

country that the MNE is not open to solicitation.

Conclusion

Emerging and frontier markets are characterised by insti-

tutional weakness and are thus more prone to corruption

than developed markets. Because of this, doing business in

these environments potentially comes at a higher cost to

MNEs that pursue ethical behaviour as they may lose

opportunities to others less scrupulous. The intention of

this research was to determine the strategies commonly

employed by MNEs expanding into African markets to

overcome weaknesses in institutions and mitigate corrup-

tion. The research findings confirm that MNEs associate

doing business in Africa with higher levels of risk and

higher costs compared to doing business in developed

markets. Uncertainty was the most commonly mentioned

challenge of doing business in Africa. This sense of

uncertainty is in itself not sufficient to deter internation-

alisation but it does lead to the substantial upfront and

ongoing commitment of resources for gaining a better

understanding of African host countries. The sources of

uncertainty as described by respondents included defi-

ciencies or inefficiencies in host-country legal and regula-

tory systems, political systems and business information

institutions. Locals in the host country may exploit this

uncertainty by providing MNEs with a ‘package of solu-

tions’ that manoeuvre through this institutional maze.

MNEs may thus be tempted to circumvent these institu-

tional weaknesses and bureaucratic delays by engaging in

forms of corruption to expedite business. Our research,

which of course is limited by being based upon the self-

reflection and reporting of MNEs, shows that the strategic

responses of MNEs to corruption in African markets is to

employ ‘avoid’ type strategies using self-regulation and

corporate policy and processes to address corruption. The

results reflect a very strong concern by MNEs of the dan-

gers of corruption within African countries and the

importance of an upfront strategy to confront it with an

unwavering centralised policy that minimises local

accommodation to prevent ‘gray’ areas from arising. This

often results in ‘over-shooting’ of policy which ends up

being more stringent in African countries than in other

destinations where corruption is perceived to be less rife.

Implications for Research and Practitioners

The research makes a contribution to the literature in

several dimensions. First, contextually, it deals with a

region of the world which is substantially under-researched

and which is particularly prone to corruption. Second, it

examines MNEs from an emerging market, South Africa,

investing in developing markets rather than the more tra-

ditional focus on advanced economy inward or outward

investment. Third, it provides empirical support for the call

Corruption, MNEs and Institutions

123

of Nielsen and Massa (2012) to reintegrate ethics and

institutional theories to help demonstrate that the causes of

ethical problems often lie within the more macro institu-

tional levels. Fourth, and most importantly, it presents in

Fig. 1 a dynamic framework of institutions, MNEs and

corruption in which complex web of associations result in

MNEs being both affected by and impacting upon the

institutional environment and in which corruption is both a

by-product and a cause of this institutional milieu. How-

ever, the results suggest that MNEs are much more aware

of themselves as ‘institution takers’, being forced to adapt

their corporate strategy to accommodate the institutional

milieu. Corruption is seen as a by-product of this institu-

tional environment. MNEs appear to underestimate their

impact on institutions both positively or negatively. The

latter by not fully appreciating MNEs as instigators of

corruption which further entrenches or ‘institutionalises’

corruption; and the former, by undervaluing how collec-

tively MNE anti-corruption corporate policy can impact on

institutional evolution. The research suggests that MNEs

do not need to get caught in a vicious cycle whereby they

perpetuate corruption in conditions of underdevelopment

and institutional voids but instead can contribute towards a

virtuous cycle through which they institutionalise ethical

foundations. Lastly, the study represents an extension of

the use of ISCT by conceptualising corruption at a macro

level and thus the need to address it as such. The theory’s

proposed construction of a set of contracts and hypernorms

reflects an institutionalised response to an institutional

problem. Nichols (2009, p. 811) concludes his analysis of

Dunfee’s contribution by stating that the ‘control of cor-

ruption requires the integration of a universal ought with a

clearly articulated local is’. In the language of our Fig. 1, it

is a reflection of the MNE’s corruption strategy as both an

endogenous outcome of the institutional is, as well as an

exogenous influence on the institutional ought.

At a practitioner level, the results of this study show that

whilst there is a growing sense of optimism regarding the

strengthening of institutions in Africa, current circum-

stances still suggest that meaningful due diligence be

observed prior to market entry. This can be reinforced by

engaging with internationally recognised advisory and

consulting firms that combine local knowledge with a

reputation for integrity and thus acts as a buffer against

pressure to commit corrupt transactions. Local partners are

also a substantial source of local knowledge and assistance

provided the risk of these partners acting in a corrupt

manner can be managed. Relationships with other MNEs,

local government and local diplomatic missions are con-

sidered valuable and complementary to an entry strategy.

The research demonstrates that MNEs can do more to

influence the institutional environment in host countries

than they presently appreciate. Systems of corruption are

complex and strong and any considerations about how to

reform them require a systemic approach to reform these

networks rather than as an isolated individual (Nielsen

2003, p. 145). Whilst institutions do impact MNEs in terms

of organisational culture and design, we echo the call of Li

et al. (2007, p. 337) that MNEs ‘can and should take an

active part in influencing the social institutions in their host

countries’. Unfortunately, this is an area where MNEs are

currently under-equipped to act and this study represents a

call to a more activist approach by MNEs to combat cor-

ruption at the macro level through institutional influence.

Suggestions for Future Research

The research attempted to understand the strategic

responses of MNEs internationalising into African markets

as a collective. However, it is clear from responses that

MNEs experience substantially different operating envi-

ronments in the different African countries and economic

areas. Further research should focus on these differences

and would include an analysis of the prevalence, type and

nature of corruption in a regional sense (for example east

Africa vs. west Africa) as well as between Anglophone,

Lusophone and Francophone countries. The impact of

colonialism on institutional development, in particular, has

a strong theoretical base (see Acemoglu et al. 2004) and it

may be worthwhile to link this with the international

business literature on the impact of institutional voids on

MNEs.

The research also considered the experiences of all

sectors and responses suggest that certain sectors experi-

ence corruption differently to others. For example, cor-

ruption in highly regulated sectors, such as construction or

financial services, appeared to be more prevalent than in

less regulated sectors such as retail. Further research should

examine how different sectors are affected by, and respond

to, corruption.

Our research was limited by its focus on large MNEs

which tend to have more resources to combat corruption

through corporate policies and procedures and also more

power to exert over host countries. Smaller companies are

more likely to be vulnerable to a corrupt environment

because they have less resources and power to withstand

systemic corruption, and this would be a fruitful avenue for

future research.

In the main, the research explored the opinions and

experiences of executive level employees. The perceptions

and experiences of operational corruption were largely

anecdotal or based on second-hand information. Further

research could involve a sample of regional management

and operational employees who are more likely to face

corruption directly and on an ongoing basis. This would

enrich the discussion regarding differences between

J. M. Luiz, C. Stewart

123

strategic and operational responses to corruption and the

consistency thereof within organisations.

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