This paper aims to apply a risk/uncertainty lens to corruption to explore how different types of corruption (formal vs informal) in a multinational enterprise’s (MNE) operating environment have different relationships to firm performance.
This paper uses a portfolio approach to measure the formal and informal corruption impacts of an MNE’s entire set of operating locations and test the hypotheses using both accounting- and market-based measures of performance on a sample of 648 firms.
This study hypothesizes and finds that because formal corruption represents risk, it is typically included in the a priori evaluations of trade-offs between market attractiveness and costs made by MNEs prior to market entry, higher formal corruption in the firm’s environment is positively related to its financial performance. Conversely, the uncertainty associated with the generally intangible and pervasive nature of informal corruption prevents similar, accurate cost consideration before entering the market, resulting in a negative relationship between higher levels of informal corruption and firm performance.
This study provides unique empirical support for the notion that MNEs can both gain and lose by investing in corrupt institutional environments, grounded in an understanding of the differences between risk and uncertainty, reinforcing the importance of considering the potential impacts of both the formal and informal dimensions of corruption in a firm’s operating environment.
