Rent(s) Asunder: Sectoral Rent Extraction & Bribery by Multi-National Corporations

1. Rent(s) Asunder:Sectoral Rent Extraction & Bribery by Multi-National Corporations DimitarGeorguiev (UCSD) Edmund Malesky (UCSD) Nate Jensen (Washington University)

2. Motivation • Ngo Vinh Long (2010): “Huge concentrations of money, especially from foreign sources, have been at the roots of many arbitrary decisions of the Vietnamese state.” • Vu Quang Viet (2010): “This has helped make Vietnam more dynamic, capable of attracting more foreign direct investment (FDI), opening up the economy outwardly and generating much more wealth, and thus offering more spoils for abuse and bribery which have reached an unprecedented scale under the current regime.”

3. The Puzzle • The prevailing theory in the literature contradicts the view of VN experts: economic openness should reduce corruption through two distinct but not mutually exclusive channels. • Mechanism – competition drives down monopoly rents and therefore cost of bribe schedule (Sandholtz and Gray 2003, Rose-Ackerman 1978, 1999) • Mechanism – learning/diffusion of good practices, lobbying, impact of FCPA ((Sandholtz and Koetzle 2000, 40, Gerring and Thacker 2005, Kwok and Tadesse2006)

4. Alternative Views in the Literature 1. Corruption Deters Investment • Directly • Indirectly through Entry Strategy 2. Openness increases corruption • Adesand di Tella also claim that corruption could worsen in high rent sectors. • Foreign firms use to solve a strategic disadvantage • Conditional relationship between openness and corruption • Quadratic effects, whereby corruption increases initially with FDI entry, but decreases as international pressure is brought to bear. • Impact of FDI on corruption depends on quality of local institutions, increasing corruption in poorly governed areas

5. Measurement Problems in Corruption Data Obscure Findings 4 Biases • Perception biases of respondents in how they respond to Likertscales. • Anchoring bias in the way corruption and bribes are understood. • Biases caused by the respondent’s confidence that the information they reveal will not be used to punish them. • Question wording which invites respondents to answer about others’ experience with corruption and not their own, leading to exaggeration of the true bribe schedule.

6. Implications of Error for Inference • Perceptions of corruption tend to be highly correlated with economic development and institutional quality, but actual corruption is not (Triesman 2007, Olken 2008). • Strong possibility of “systematic, variable measurement error.” Errors in the measurement of corruption are correlated with factors that are attractive to foreign investors. Some are measurable, many are not. • Tell-tale signs. Institutions and wealth explain 90% of the variation in corruptions, but have no correlation with actual activity. • Aggregate data predicts less reductions in corruption, but firm-level data shows foreign investors more likely to admit complicity.

7. Secondary Issue with Corruption Data • Corruption manifests itself in a number of ways and impacts individuals differently. • Petty corruption – small bribes during regulatory procedures, inspections, or policing. • Grand corruption – bribes during procurement, kick-backs on government contracts, abuse of government resources. • General questions ask individuals to discuss issues of corruption that they may have never experienced. • General questions are not useful for understanding the implications of particular policy choices.

8. Our Three Theoretical Refinements • Allow for possibility that foreign firms are complicit in bribing. • Focus on two particular form of economic – openness: • FDI vs Domestic Firms • The removal of administrative and regulatory restrictions • Acknowledge that not all gatekeepers have the same level of extractive power, where restrictions create greater opportunities for rents, we should expect higher level of corruption. Hypotheses H1: The propensity of foreign firms to bribe increases with economic rents. H2: The removal of investment restrictions will: a) reduce economic rents in a sector. b) reduce the willingness of foreign firms to bribe.

9. Toward a Precise Method of Measuring Corruption • Unmatched Count Technique (UCT, LIST) Question (Raghavarao and Federer, 1979). • On one form, respondents are asked how many innocuous but relatively infrequent activities they participated in over a clearly defined time period and location. • The second group of respondents receives the same list of innocuous items as well as an additional sensitive item. • Respondent only must recall the number of activities they engaged in and must never admit to sensitive behavior. • Aggregation protects privacy and shields complicity. • The difference in means between the two forms provides the proportion of respondents participating in the sensitive action. • The technique has been shown to provide the most accurate and confidential assessments of sensitive activity in repeated testing (Coutsand Jann2009). • Estimate (Probability of Bribery) = Mean (Form A) – Mean (Form B)

10. Laboratory Results For Sensitive Question Techniques

11. Our UCT, Designed to Measure Corruption During Business Entry

12. Sample and Method • 7,300 Domestic, Private Enterprises AND 1,155 Foreign Direct Enterprises in Vietnam. • Survey from Summer of 2010, as part of Vietnam Provincial Competitiveness Index Survey. • LIST questions embedded into survey. • 35% response (high for business surveys), but problematic – detailed comparison to underlying population to make sure not biased (Appendix 2) • 30% item non-response to LIST question. We use multiple-imputation, but make sure results are biased by procedure.

14. Propensity to Bribe During Registration

15. By Foreign and Domestic Firms

16. Ceiling/Floor Effects are Negligible.

17. Measuring Restrictions on FDI Entry • We take advantage of the fact that Vietnamese investment laws require special approval from the Prime Minister’s Office for certain sectors (Group A). • We code these sectors at the four-digit ISIC level, over time. • Measure is nice, because it is less subject to simultaneity bias. • Excerpt of our coding scheme

18. Rents are Significantly Higher in Protected Sectors

19. Do Restrictions Generate Rents?

20. Multiple Regression using LIST Method Conditional model of predicted sensitive activities

21. Cross-Sectional Analysis

22. Results for H1 • Confirmation of H1: Whenallvariables are held constant at their mean, foreign firms attempting to enter restricted sectors have a 31% predicted probability of engaging in bribery, 14% higher than their domestic competitors in restricted sectors and 19% more likely to bribe than foreign firms in non-restricted sectors. • Robust to: Year FE, Province FE, Truncation, Glynn Piecewise Regression Non-Imputation. • Holds for Type of investor: OECD v. Non-OECD; 100% FDI v. JV; Industrial Zone v. External • OECD investors in restricted sectors are less likely to bribe. • Firms in Izs (in non-restricted sector are less likely to bribe).

23. Figure 4: Differences in Bribe Frequency(By Foreign Firms, Restricted Sectors, and WTO Entry)

24. Over-Time Analysis

25. Results for H2 • Mixed conclusions for Hypothesis 2. While opening up to foreign competition does reduce the propensity for MNCs to bribe, it compels their domestic competitors within the same sectors to increase their level of bribery. • In years where a product faced restrictions, MNCs were more likely to pay bribes. Foreign firms facing Group A restrictions pay 12.5% more than firms in the same sector that did not face such restrictions. • Reducing the protections for domestic firms had the opposite effect. The rate of bribery among domestic firms, now suddenly subject to increased foreign competition, actually increased by an average of 14.7%. • Robust to truncation, piecewise, and non-imputation. • Helps explain why the Vietnamese analysts, who primarily cite domestic incidents, have observed an uptick.

26. Conclusions • More refined analysis of globalization and corruption. • Openness can have differential effects on corruption, even within the same country and the same institutional setting. • Foreign firms are not necessarily victims, they appear willing to bribe if the rents justify the activity in both entry and procurement. • In lower-rent industries, there is no positive or negative influence of “foreigness.” • Removing restrictions and subjecting a country to globalization can impact corruption indirectly, by enhancing corruption in the domestic sectors.