Corruption and Bribery:
Trade and Investment Impacts
Even in the UK, a quarter of the UK-based international companies say that
they have lost business to corrupt competitors in the last five years.
International Business Attitudes to Corruption – Survey 2006
Corruption distorts markets and, like other forms of anti-competitive behaviour, damages all involved in the supply of goods and services – and ultimately national economies.
No country is immune from corruption.  It flourishes where the criminal justice system and governance is weak, where decision-making is unaccountable and access to decision-makers is dependent on restricted social networks, where pay is low and where management controls are weak.
Corruption deters companies from investing
The World Bank identified corruption as the biggest impediment to
investment in an investment survey of nine African countries.
A 2006 survey of seven countries by risk consultancy Control Risks found that
More than 35% of companies surveyed had been deterred by an otherwise
attractive investment because of the host countries reputation for corruption.
ECGD recognises that bribery and corruption distorts competition and investment,
hinders free and fair trade, and represents an unacceptable cost to business.
UK Export Credits Guarantee Department (ECGD)
Corruption’s negative impact on foreign direct investment can amount to an extra 20% in tax –
discouraging investment and reducing profit margins. IMF research suggests that corruption
reduces investment by around 5% and that an
increase of 1 point in the corruption index can result
in a reduction of foreign investment by as much as 8%.
The adverse macro-economic impacts are self-reinforcing. As Control Risks notes:
If good companies avoid investing because of concerns about corruption,
host countries also lose out: the investors that they attract are likely to have lower
standards, both of integrity and professional competence.
Reputation matters in another respect. When companies from emerging economies enter
the international market, they find it harder to win the trust of partner companies.
Corruption denies companies contracts that would create jobs and have knock-on economic benefits
Companies lose business because they are unwilling to pay bribes or are out-bribed by competitors. The 2006 Control Risks Survey reports:
Overall, 43% of respondents believe that they failed to win new business
in the last five years because a competitor had paid a bribe,
and one-third had lost business to bribery in the last year.
Corruption drives up the cost of capital investment
Transparency International's 2005 Global Corruption Report points out that:
Corruption by holders of public office can deter foreign investment,
stifle economic growth and sustainable development, and undermine legal and judicial systems.
G8 Summit Communiqu�
Fighting high level corruption July 2006
Capital is to an extent different each time�
For example new buildings are more difficult to price than new trucks.
Unlike with new trucks, the supplier – the builder – has more information
about the true cost than does the purchaser. This difference in information –
known as an ‘information asymmetry’ – translates into an opportunity for corruption.
The direct effect of such corruption is to drive up the cost of building infrastructure –
that is, the capital cost.
Corruption increases business risk
Paying bribes incurs high reputational and other risks for companies. As Control Risks points out:
Bribery is a widespread phenomenon in international business transactions,
including trade and investment, which�undermines good governance and economic development
and distorts international competitive conditions.
OECD Anti-Bribery Convention
Corruption demands secrecy, but there are fewer secrets in an era of rapid,
worldwide communication. Those who break the rules are more likely to be found out.
A corruption scandal in one part of the world will affect a company’s reputation –
and its commercial prospects – thousands of miles away.
In addition, bribe paying has its own dynamic:
Once a company has a reputation for paying,
officials will seek an opportunity to levy their ‘share’.
It is hard to resist when a company’s earlier behaviour suggests a willingness to pay.
- OECD, ‘Anti-bribery Convention’, Preamble.
- ECGD, Bribery and Corruption.
- All Party Group on Africa, The Other Side of The Coin: The Uk and Corruption in Africa,2006
- Control Risks, International Business Attitudes to Corruption – Survey 2006.
Christian Schiller, IMF Fiscal Affairs department,
Improving Governance and Fighting Corruption: An IMF Perspective, 31st March 2000.
- World Bank, Corruption, Poverty and Inequality.
Paul Collier and Anke Hoeffler,
The Economic Cost of Corruption in Infrastructurein Transparency International, Global Corruption Report 2005.
- Control Risks, Facing up to Corruption.
1. A common definition of corruption is
the abuse of public or private office for personal gain. (Asian Development Bank, Anti-Corruption: Policies and Strategies,
Description and Answers to Frequently Asked Questions, Manila, Philippines, 2000, p.1)
The UK government defines bribery as "the receiving or offering/giving of any benefit (in cash or in kind) by or to any public servant or office holder or to a director or employee of a private company in order to induce that person to give improper assistance in breach of their duty to the government or company which has appointed them." (Foreign and Commonwealth Office, UK Bribery and Corruption Law, May 2006)
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