Corruption: Multinationals in developing countries – who’s accountable?

By on 17/07/2017

Evidence shows corruption can actually increase in some developing countries after deregulation. Dr Pallavi Roy, Convenor of MA Globalisation and Multinational Corporations at SOAS University of London, sets the scene for multinationals operating in developing countries.

Issues of governance and accountability for the private sector fall at an interesting interface, as firms in the sector are both victims of rent-seeking and corruption as well as, at times, willingly or unwillingly participants in rent-seeking.

This is all the more compounded for multinational corporations (MNCs) from developed economies who want to invest in developing countries. However, very little research has been conducted on what the drivers of corruption are in the private sector.

The contradiction here is that these MNCs are headquartered in countries with relatively better standards of corporate governance and rule of law than those found in developing countries. Therefore doing business in the host economy might mean bending a few rules – but such operations are hampered by strictures in their home economy. Equally the ability of private sector corporations to do business in corrupt environments varies greatly across sectors and countries.

Private sector corruption is usually a result of the collusion between powerful economic and political interests that can be to the detriment of other players who might actually be more efficient than the entrenched powerful firm. And such firms can be both MNCs as well as local private sector players.

As a result, other players could face obstacles like overpricing, regulatory pricing or barriers to entry. Not much has been researched on the nature of corruption in the private sector and indeed its preventability. But a few policy instruments like deregulation cannot be expected to solve the underlying constraint which has to actually do with how power is distributed between stakeholders who engage in these business deals. In fact evidence shows corruption can actually increase in some developing countries after deregulation!

Research that gives us the ‘Doing Business’ surveys have been very helpful but they cannot account for the specificities of each context that the private sector operates in, which includes widely diverging host country contexts. Hence the private sector, including MNCs, needs to be served by research that accounts for sectoral diversity and focuses on sector specific policy solutions rather than universal ‘one size fits all’ solutions.

This is the only way to serve the interests of the productive private sector in developing countries which includes many MNCs. And the best start is by identifying incremental, impactful and feasible policies that focus on specific sectors. Big bang reforms sound good but their implementation is too often limited to being on paper, given their levels of ambitions, which is changing power structures.

MA Globalisation and Multinational Corporations is also available as an Online and Distance Learning programme.

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