Rent(s) Asunder: Sectoral Rent Extraction Possibilities and Bribery by Multinational Corporations

Edmund Malesky (University of California, San Diego), Nathan Jensen (Washington University) and Dimitar Gueorguiev (University of California, San Diego)
Working Paper
11-20
December 2011

Openness to foreign investment can have differential effects on corruption, even within the same country and under the exact same domestic institutions over time. This theoretical approach departs from standard political economy by attributing corruption motives to firms as well as officials. Rather than interpreting bribes solely as a coercive "tax" imposed on business activities, it allows for the possibility that firms may be complicit in using bribes to enter protected sectors. Variation in bribe propensity across sectors is anticipated according to expected profitability which is proxied with investment restrictions. Specifically, it is expected that foreign investment will not be associated with corruption in sectors with fewer restrictions and more competition, but will increase dramatically as firms seek to enter restricted and uncompetitive sectors that offer higher rents. This effect is tested using a list experiment, a technique drawn from applied psychology, embedded in a nationally representative survey of 10,000 foreign and domestic businesses in Vietnam. Findings show that the impact of domestic reforms and economic openness on corruption is conditional on polices that restrict competition by limiting entry into the sector.