| Summary: | Government corruption is a pervasive element of the international business
environment and has damaging effects on governments, firms, and the broader society in
which it takes place. Recently publicized scandals in Russia, China, Pakistan, Lesotho,
South Africa, Costa Rica, Egypt, and elsewhere underscore the extent of corruption
globally, especially in the developing world. Yet, the impact of government corruption on
foreign investment has received limited attention. In this article, we examine how
multinational firms respond to corruption when investing in foreign markets, especially
developing countries. The article begins with a discussion of the direct and indirect costs
of corruption to business and provides illustrations of corruption’s impact on firms that
invest in foreign markets. We employ a framework that incorporates two basic
dimensions of government corruption—pervasiveness and arbitrariness. We then propose
five broad strategies that multinationals should consider in responding to corruption and
give examples of organizations that use these approaches. Corruption involves costs that
firms investing abroad are likely to misjudge or ignore. A clear understanding of
corruption’s nature creates value for decision makers and allows for a strategic analysis
of responses to corruption pressures.
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