14 Aug 2013Working Paper Summaries

Firm Competitiveness and Detection of Bribery

by George Serafeim

Bribery is widespread around the world, illegal, detrimental to economic progress and social stability, and at the same time it can have clear economic benefits for a firm. While the benefits of bribery for a firm, through acquisition of contracts or avoidance of government bureaucracy, are intuitive and well documented, the costs after detection are less well understood. In this paper the author examines how the impact on firm competitiveness from the detection of bribery varies with the identity of the initiator, the method bribery was detected, and the firm's response after detection. All three dimensions are significantly associated with the impact on firm competitiveness. In addition, the data suggest that the most significant impact is on employee morale, followed by business relations and reputation, and then regulatory relations. Key concepts include:

Internally initiated bribery from senior executives is correlated with higher likelihood of significant impact.
Bribery cases detected by the internal control systems of the firm are associated with a lower likelihood of significant impact on the business and regulatory relations of a firm.
Firms that responded by firing an employee or ceasing business relations with outside parties that initiated the bribery have lower likelihood of significant impact.
Understanding how managers' perceptions of impact on firm competitiveness vary with characteristics of the bribery case is likely to provide with useful evidence on how managers think of the costs of bribery.

Author Abstract

Using survey data collected from senior corporate executives around the world I analyze how detection of bribery impacts firm competitiveness. The data suggest that the most significant impact is on employee morale, followed by business relations and reputation, and then regulatory relations. I find that who initiated the bribery act, how it was detected, and how the firm responded after detection are all associated with the impact on a firm's reputation, business relations, regulatory relations, and employee morale. Internally initiated bribery from senior management is more likely to be associated with a significant impact on firm competitiveness. Bribery detected by the control systems of the firm is less likely to be associated with a significant impact on both business and regulatory relations. Finally, bribery cases where the initiator of the bribery is dismissed are less likely to be associated with a significant impact of firm competitiveness. These results shed light on which organizations' competitiveness is more likely to be affected by the detection of bribery.