Corruption in Africa – What’s at stake for new business entrants?

Some literature on corruption that explores/analyses the competitive advantage established actors enjoy over new entrants in such an environment.

1. Basic concepts

Modes of entry

Equity-based
• Wholly-owned corporations
• Equity joint ventures
• Equity forms of entry involve build-own-operate projects in which firms maintain ownership and control, involving a long-term commitment to the country.

Non-equity based
• Contractual agreement
• Export
• all entry events in which the MNE is engaged for its technological and managerial competencies and does not assume any ownership (i.e., management contracts)

Corruption

The abuse (or misuse) of public power for private benefit (Bhardan 1997, Treisman 2000)

2. The place of established actors vis-à-vis corruption levels

• Arbitrariness of corruption is an important nuance, if corruption is not strictly arbitrary it tends to become more like a tax that can be more easily taken into account in the companies’ strategic calculations (Klaus et al:2006). Established companies hold a competitive advantage in carrying out these calculations and dealing with such uncertainty (Alvarenga)
• Challenges of entry and postentry survival include accessing infrastructure services, obtaining local licenses, and managing a host of legal issues related to operation(Klaus et al:2006).
• Econometric evidence on bribe propensity and intensity suggest that medium-size firms are the ones that suffer most from corruption in Mauritania. Larger firms are more established and connected, do not fear exiting the market and less likely to be harassed. Smaller firms are less visible and may be able to escape the control of public official, by operating largely in the informal sector. (Francisco and Potara 2007) – case study Mauritania
• WEAKNESS - Independent of the level of arbitrariness, however, pervasive corruption may reduce the benefits of local (established) partners because compliance with government corruption can yield government support, create access to political processes, and reduce institutional complexity(Klaus et al:2006)

3. New entrants – acting and adapting to corruption

• find that firms adapt to the pressures of corruption via short-term contracting and entry into joint ventures (Klaus et al:2006)
• In Cape Verde the Chinese are increasingly visible as a relatively wealthy minority also makes them prone to other forms of exploitation. Local landlords letting out shop premises and apartments to Chinese have pushed up prices to such an extent that it is no longer easy to make a profit in the baihuo trade. Some officials who deal with Chinese have also started asking for personal favours. While most Chinese say that corruption is not as serious in Cape Verde as in China, it appears to be rising, and is and is perpetuated as requests for bribes are met (Haugen and Carling 2005)
• MNEs use nonequity-entry modes or joint ventures as an adaptive strategy to participate in markets despite the presence of corruption(Klaus et al:2006)
• firms engage in nonequity entry in countries with high levels of corruption arbitrariness(Klaus et al:2006)
• Local partners can reduce risks associated with equity entry and help overcome the liability of foreignness by providing access to location-specific knowledge and local networks, fostering external legitimacy, and lowering direct costs of entry(Klaus et al:2006)


4. References

Uhlenbruck, Klaus, Peter Rodriguez, Jonathan Doh, and Lorraine Eden. "The impact of corruption on entry strategy: evidence from telecommunication projects in emerging economies" Organization Science. 17.3 (May-June 2006): 402(13).

Bhardan, P. 1997. Corruption and development: A review of issues. J. Econom. Lit. 17(3) 1-26.

Treisman, D. 2000. The causes of corruption: A cross-national study. J. Public Econom. 67(3) 399-457.

Manuela Francisco & Nicola Pontara 2007 Does Corruption Impact on Firms’ Ability to Conduct Business in Mauritania? Evidence from Investment Climate Survey Data

Heidi Østbø Haugen and Jørgen Carling 2005 On the edge of the Chinese diaspora: The surge of baihuo business in an African city Ethnic and Racial Studies Vol. 28 No. 4 July 2005 pp. 639_/662