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A Comparative Analysis of Business Corruption in Russia and China Department of Business Studies Master of Business and Management 5/27/2010
Abstract
This paper is a comparative analysis of Russian and Chinese markets in terms of business corruption. This study is based on quantitative and qualitative case analysis and small surveys according to different criteria.
The aim of this work is to find out the general feature of corruption and show main differences and similarities on corruption practices in Russian Federation and People’s Republic of China. Along with the comparative study this paper also presents general overview on corruption from historical point of view.
The results of the analysis show the main characteristics of the corruption phenomenon in China and Russia according to popularity of corruptive behavior, typology of bribes, reasons for corruptive acts, impact from different local cultures, such as “Guanxi” and “Blat”, and also the structure of enterprises.
We believe that our work may be proved useful for further researches on this subject, and also help business managers to avoid disadvantages caused by lack of knowledge on corruption phenomenon when doing business in Russia and China.
Key words: Business corruption, Russia, China, Bribe, Culture, Structure
Authors
Denis Korobkov | 860826-P353
Mingshi Yue | 831023-P157
Zhihua Liu | 840812-P260
Supervisor
Rian Drogendijk
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“I see in the near future a crisis approaching that unnerves me and causes me to tremble for the
safety of my country. Corporations have been enthroned, an era of corruption in high places will
follow, and the money-power of the country will endeavour to prolong its reign by working upon
the prejudices of the people until the wealth is aggregated in a few hands and the Republic is
destroyed.”
Abraham Lincoln (1863)
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Table of Contents
1. Introduction............................................................................................................................................... 4
1.1 Problem’s background ........................................................................................................................ 4
1.2 Research question ............................................................................................................................... 4
2. The history and evolution of corruption ................................................................................................... 5
2.1 The history of corruption in Russia ..................................................................................................... 8
2.2 The history of corruption in China .................................................................................................... 10
3. Literature review ..................................................................................................................................... 11
3.1 Corruption basics .............................................................................................................................. 11
3.2 Theories and Logic ............................................................................................................................. 13
3.3 Summary ........................................................................................................................................... 17
4. Methodology section .............................................................................................................................. 19
4.1 Design of the study ............................................................................................................................ 19
4.2 Sources selection ............................................................................................................................... 19
4.3 Case selection .................................................................................................................................... 21
4.4 Amount of data ................................................................................................................................. 22
4.5 Analyzing data ................................................................................................................................... 22
5. Research on business corruption. Russia ................................................................................................ 22
5.1 Survey results. Russia ........................................................................................................................ 25
5.2 Analysis summary for Russia ............................................................................................................. 26
6. Research on business corruption. China ................................................................................................. 28
6.1 Survey results. China ......................................................................................................................... 34
6.2 Analysis summary for China .............................................................................................................. 35
6.2.1 Guanxi is the most important relationship in Chinese culture .................................................. 35
6.2.2 Institutional Deficiency of the state-owned enterprises ........................................................... 35
6.2.3 Rent Seeking and corruption of foreign companies in China ..................................................... 36
6.2.4 Invisible bribe and the imperfect law in China ........................................................................... 37
7. Comparative analysis results ................................................................................................................... 38
7.1 Comparative results of the surveys study ......................................................................................... 39
8. Conclusion ............................................................................................................................................... 42
8.1 Further research ................................................................................................................................ 43
References ................................................................................................................................................... 44
Appendix 1. The Survey Example ................................................................................................................ 48
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Introduction
Problem’s background
Over the last two decades a number of developing countries led by BRIC (Brazil, Russia, India
and China) held a round of high speed developing period. They are playing more and more
important roles in the world’s economy. With the high speed of developing, the problems such
as corruption in business sector increasingly became the focus of attention.
Being defined shortly by Transparency International (an international non-governmental
organization, which publishes annual reports on corruption condition in the world), corruption
“is the abuse of public power for private benefit” (Transparency International, 2009). The “act
of impairing integrity, virtue, or moral principle; the state of being corrupted or debased; loss of
purity or integrity; depravity; wickedness; impurity; bribery” (Webster's Dictionary, 1913). All
these can be described as corruption.
Corruption is a widely spread phenomenon, even though many national governments have
often undertaken efforts to reduce it. As we know the degree of corruption in a country can
have a profound impact on the country's economic development as well as firm valuations
within the country (Chashin, 2009). In the past ten years various researches have been actively
carried out in the field of corruption. This problem is studied not only at regional and national
organizations and institutions, but also on international level.
Russia and China, as the leaders of the fast developing countries, are facing a similar situation in
corruption. According to the Worldwide Corruption Perceptions Ranking of countries published
by Transparency International in 2009, China ranked 79 in 180 countries with the CPI
(Corruption Perception Index) of 3.6, while Russia ranked 146 with the CPI of 2.2.
Research question
Acts of corruption may happen on political level, among state officials, in commercial
organizations etc. However, due to limited time and resources we decided to focus on business
sector and study corruption activities which mostly take place in various companies. Because of
the personal interest and knowledge of local markets, we have chosen Russia and China, two
countries which play important role in world economy and have a high percentage of corrupt
activities (Transparency International, 2009). We will find out not only about the situation and
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reasons for corruption practices in these countries, but also the factors which can influence this
phenomenon in different spheres such as culture and industry structure. It is interesting to
study Russia and China, considering these factors as far as both countries have a number of
similarities such as long history of state owned enterprises and planned economy and at the
same time there is a difference between cultures for example. We believe our study may be
proved useful for further researches on the same subject and also help business managers to
avoid disadvantages caused by lack of knowledge on corruption phenomenon when doing
business in these countries.
The rest of this paper is organized as follows. In order to give the readers a clear cognition of
corruption in Russia and China, in the next section we will provide information on the
corruption phenomenon from a historical point of view, present some interesting facts on
corruption, and provide useful background information on this phenomenon both for Russian
and Chinese markets. Then we will switch to “Literature review” section and present basics on
corruption and a number of theories which we used in our research. The “Methodology” part
will describe the overall design of our thesis and contain information on how we collected and
analyzed various data. Separate analyzing will be done for each country by case analysis chiefly
and an assistant survey study. In the last section of our thesis we will provide the summary and
comparative analysis on markets of Russian Federation and People’s Republic of China.
The history and evolution of corruption
In modern business world corruption is one of the main threats. But was it always like this? We
decided to start with a history of corruption and present general information and the evolution
of this phenomenon from the ancient times up to the modern society.
In the early class society to pay a priest, a leader or a captain for a personal attitude was seen
as a universal norm. The situation began to change with the complexity and professionalization
of the state apparatus. Rulers of the highest rank demanded that the subordinate "employees"
were content with just a fixed "salary". On the contrary, officials of a lower rank preferred to
secretly receive or claim additional fee for their services (Adrianov, 2009).
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In the early stages of the history of ancient societies (ancient Greek city-states, Republican
Rome), when there was no professional public officials, corruption was almost absent. This
phenomenon began to flourish only in an era of decline of antiquity, with the appearance of
such public officials, which were described as: "He came poor in a rich province, but went rich
of the poor province" (Adrianov, 2009). At this time in the Roman law a special term
"corrumpire" appeared, which was a synonymous with words "port", "bribe" and served to
indicate any abuse of official position (Adrianov, 2009).
Where the central authority was weak (for example, in Europe in the early Middle Ages), the
use of official position for personal requisitions became normal. Thus, in medieval Russia,
"feeding" governor and appropriation of fees for conflict resolution were considered ordinary
income for servicemen people (Latov, 2005).
The more society was centralized and formalized, the more strictly it limited the autonomy of
its citizens, provoking lower and senior officials to secretly violate the law in favor of nationals
who wished to get rid of strict supervision. Since the government usually didn’t have the
strength for the total control over officials activities, it generally was satisfied with the
maintenance of some "tolerable standards" of corruption (Adrianov, 2009).
Most vividly this moderate tolerance for corruption was evident in the societies of the Asian
mode of production. In pre-colonial countries of the East, on one hand, the rulers claimed for
universal "accounting and control", but on the other hand, they constantly complained about
the greed officials, who “confused” their own pocket with public treasury. These were the
eastern societies who first started to investigate corruption (Satarov & Parhomenko, 2001).
A fundamental change in social attitudes towards personal income of government officials took
place only in Western Europe, in the era of modern times. The ideology of social contract
proclaimed that citizens paid taxes in exchange for reasonable laws and their strict
implementation (Latov, 2005). Personal relationships were giving way to purely official, and
therefore for public officials, who were receiving a personal income, apart from their official
salary were claimed as people who violated public morality and norms of the law (Satarov &
Parhomenko, 2001).
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A new stage in the evolution of corruption in developed
countries was during 19th and 20th centuries. With the
growing importance of political parties in developed
countries (particularly in Western Europe after World War
II) was the development of party corruption, when
lobbying for their interests, large firms paid to party large
funds. Big politicians became to treat their position as a
source of personal income. For example, in Japan even
these days’ political leaders, who help private corporations
to obtain favorable contracts, expect to receive interest
from transactions (Latov, 2005).
In the second half of the 20th century, after the
appearance of a large number of politically independent
Third World countries, their state apparatus, as a rule,
originally was heavily exposed to systemic corruption. In
fact the "eastern" tradition of personal relations between
the chief and the “client” were superimposed by huge
uncontrolled opportunities related to government
regulations in many spheres of life (See “Mr. 10 percent”
case). Typically it was the corruption from the bottom up,
when the chief could blame the lower levels, but also the
top down corruption, when corrupt high ranking officials
didn’t hesitate to take bribes, and even share them with
subordinates (such a system of corruption existed, for example, in South Korea). In the "third
world" Kleptocratic regimes appeared (Philippines, Paraguay, Haiti, in most African countries),
where corruption was totally penetrating all socio-economic relations, and nothing could be
done without a bribe (Latov, 2005).
The growth of international economic relations also stimulated the development of corruption
(See “The Lockheed Scandal” case). When signing contracts with foreign buyers, large
multinational corporations even begun to legally include costs for "gifts” in negotiating costs
(Riceman, 2000)
Mr. 10 percent
President of Indonesia, Suharto, was known as "Mr. 10 percent" since all active foreign corporations in this country were to pay a clearly defined bribe to the president and members of his family clan (Krugosvet Encyclopedia, 2009).
Lockheed Scandal
A famous scandal in the 1970's in which a U.S company was involved. The Lockheed firm gave large bribes to senior politicians and officials of Germany, Japan and other countries to sell aircrafts of a bad quality. From about that time, corruption was understood and treated as one of today's main global problems hampering the development of all countries (Krugosvet Encyclopedia, 2009). The picture is not available in the electronic version for reasons of copyright.
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Even more pressing the problem of corruption was in the 1990's, when the post-socialist
countries demonstrated the extent of corruption, comparable to the situation in developing
countries. Often, a paradoxical situation arose when the same person simultaneously held
important positions in both the public and commercial
sectors; as a result many officials abused their position,
without taking bribes, but directly protecting their personal
business interests.
Thus, the general trend of the evolution of corrupt relations
in 20th century is a gradual multiplication of their forms and
the transition from sporadic and petty corruption to
systematic top and international.
The next part of our thesis will provide general information
on corruption practices in Russia and China from the
historical point of view. We believe it is necessary to provide
information on problem’s background before starting our
analysis, as far as it may give general feeling and show the
evolution of the phenomenon for each country.
The history of corruption in Russia
An epidemic of bribery and thievery of the officials were first
understood as an obstacle to the development of the
country during the times of Peter I (see a historical
anecdote). It is known that a chief fiscal Nesterov who was
personally appointed by Emperor for control of bribery
himself was in the end executed for taking bribes (Chashin,
2009). Mixing public treasury with personal pocket was
typical not only in the 18th, but also in the 19th century. A
famous book “Revizor” by Nikolai Gogol was based precisely
on the fact that almost all official ranks were systematically
A known historical anecdote
When Emperor decided to issue a law according to which any servant who would steal a sum which was equal to the price for buying a rope was to be hanged, his companions with one voice declared that, in this case, the emperor will be left without servants (Chashin, 2009).
The picture is not available in the electronic version for reasons of copyright.
Revizor (The Government Inspector) by Nikolai Gogol, 1836
A satirical play by the Russian novelist Nikolai Gogol; published in 1836. Based upon an anecdote allegedly recounted to Gogol by Pushkin, the play is a comedy of errors, showing human’s greed and stupidity along with the deep corruption of state apparatus (Krugosvet Encyclopedia, 2009).
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abusing their position and were constantly in fear of being exposed. Only after the Great
Reforms in 1860 the level of corruption in Russia began to fall, though it was still higher than
"the average European" level (Bogdanov & Kalinin, 2001).
Corruption in the Soviet Union was quite ambivalent. On one hand, abuse of power was seen as
one of the most severe violations since it undermined the authority of Soviet power in the eyes
of citizens. On the other hand, state control workers in the Soviet Union were formed into
some kind of government-class, which was against “usual people” and was out of their control.
Punishment for bribe-takers was serious; in some cases even death penalty. At the same time
representatives of the “nomenclature” were actually under the jurisdiction and were not afraid
of punishment. In the 1970s corruption began to take systematic form, and became
institutionalized (Rumjanceva, 2010). Some work places which could give access to wide scope
for abuse became literally sold.
Although the radical liberals led by Boris Yeltsin (Russian president, 1991-1999) came to power
under the slogans of anti-abuse, but they themselves, once in power, even overcame their
predecessors. Surprised foreigners even stated that in Russia of 90's, "most government
employees simply didn’t realize that personal enrichment was a criminal element"
(Rumjanceva, 2010). There were many reasons for such conclusion. The fact was that the
incomes of state officials were relatively low, but without them the favor of doing business was
virtually impossible. Particularly rich opportunities for abuse of power emerged during the
privatization process.
The most negative feature of the post-Soviet corruption was its decentralization. If, for
example, in China or Indonesia it was enough to bribe a few senior administrators, in Russia you
had to pay also to "petty bosses", such as health and tax inspectors (Rumjanceva, 2010).
In a study which was conducted in 2004-2005 by the "Informatics for Democracy" was
highlighted that around 37 billion dollars is annually spend on bribes in Russia (about 34 billion -
bribes in business) which is almost equal to income budget of the country. Although this
assessment among some professionals was deemed too high, and among others quite low, it
showed the scale of post-Soviet corruption.
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In early 2006 the Government of Russia began to
demonstrate a desire to limit corruption levels, but because
of the wide scope of this phenomenon, it cannot be reduced
to standard levels even nowadays (Rumjanceva, 2010).
The history of corruption in China
Since the ancient times corruption in China was a very
serious problem. At that time, corrupt activities such as
bribery and speculation in the government were very
common for persuading one’s interests. In ancient era, for
example, the position of government officer could be easily
sold and bought (Zhao 1997). Nepotism and relationships
were the most important factors for recruiting officers. In
18th and 19th century, the corruption reached the worst
condition in Chinese history. After the socialistic regime was
established in 1949, the corruptive behavior changed and
“offered” fewer opportunities for illegal activities (Zhao
1997). However, due to the long history of corruption in the
past, China still suffers from widespread corruption. For
2008, it was ranked 72 of 179 countries in Transparency International's Corruption Perceptions
Index.
Present situation has a great impact on Chinese society. Chinese specialist Minxin Pei (2007)
argues that “failure to contain widespread corruption is among the most serious threats to
China's future economic and political stability. Bribery, kickbacks, theft, and misspending of
public funds cost at least three percent of GDP”. The amount of money stolen has risen
exponentially since the 1980s, and corruption is now mostly concentrated in the sectors were
the state is involved (real estate, infrastructure projects, financial services). The lack of
supervision means that such areas are exposed to theft and bribery. Minxin Pei (2007)
estimates “the cost of corruption could be up to $86 billion per year”. Pei also mentions that
corruptive situation in China harms the business interest from Western countries, especially
foreign investors, who risk human rights, environmental, and financial liabilities. (Minxin Pei,
2007).
The picture is not available in the electronic version for reasons of copyright.
About China
China is a country with specific political and economical history. China is a socialistic country from 1949, all the resources are common able. Before the reform and opening up in 1979 all companies are state owned. After 1979, private companies come into existence, foreign investment become more and more, but state owned companies are still in the main place. In the 1990s another round of reform started, the stock and exchange market was set up, some state owned companies become partly private owned, a lot of companies going into public financing.
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According to Yan (2004), institutions of the state are blamed for worsening corruption
condition in reform-era China and the government is criticized for obvious "blind faith" in the
market and especially for its corrupt of authority and losing control of local agencies and
agents. Others also see strong connections between declining institutional and enhancing
corruption (Yan, 2004). The politically unchallenged regime in China creates opportunities to
exploit and control the growth of economic opportunities; and while this happens, there are no
effective counter-measures (Johnston, 2006).
However, China’s anti-business bribery work shows that it has begun to fight against corruption
from both the supply side and the demand side, and in a more balanced way (Transparency
International, 2009).
Literature review
In this section, we discuss the relevant literature for our topic, present the basics of what
corruption is about and describe a number of theories which were used during our research.
“Corruption Basics” part includes the definition of corruption and its typology. In the next part,
“Theories and Logic”, we define a number of theories which will help us to analyze the
corruption practices in two countries. We describe why we use these theories, how are they
related to corruption behavior and how are these theories implemented in the further analysis.
Corruption basics
There are many definitions of corruption (Volzhenkin, 1998; Friedrich, 1972; Heidenheimer,
Johnston, Le Vine, 1989; Meny, 1996; Nye, 1967; Palmier, 1985; Rose-Ackerman, 1978; Wewer,
1994 and others). Perhaps the most short and accurate of them: "abuse of public power for
private gain" (Rose-Ackerman, 1978). Similar definitions are found in UN documents. A more
complete of them is contained in the documents of the 34th session of UN General Assembly
(1979): "Implementation of any action or inaction by an official in the sphere of his authority for
remuneration in any form for giving such rewards as a violation of official instructions and
without”.
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Mostly by corruption we mean bribes, illegal incomes, government bureaucrats, who extort
their citizens for personal gain etc. However, in a more general sense, participants in corrupt
relations can be not only government officials but also, for example, managers of firms. Bribes
can also have different forms; the initiators of corrupt relationships can be not only
government officials, but businessmen. Since the forms of abuse of official position are very
diverse, there are various criteria for distinguishing different types of corruption. We use the
typology by Satarov and Parhomenko (2001) for our analysis (see table 1).
Table 1. The criteria for the typology of corruption
The criteria for the
typology of corruption
Types of corruption
Who is abusing official
position
State (state officials)
Commercial (managers of firms)
Political (political figures)
Who is the briber
Individual payoff (from the citizen)
Business bribe (from a legal firm)
Criminal bribery (by criminal entrepreneurs)
Benefits derived from
corruption
Cash bribes
Exchange Services (patronage, nepotism)
Objectives of corruption in
terms of the briber
Accelerating bribe (accelerating services)
Inhibitory bribe (violating the rules)
Bribe "for a good attitude"
The degree of centralization
of corrupt relations
Decentralized corruption (each payer acting on its own initiative)
Centralized corruption "bottom up" (bribes, routinely collected by
subordinate officials, are divided between them and a parent)
Centralized corruption "top down" (bribes, routinely collected by senior
officials, partly delegated to subordinates)
The prevalence of corrupt
relations
Petty corruption (in the lower and middle echelons of power)
Grand corruption (the higher officials and politicians)
International corruption (in the sphere of international economic
relations)
So what is business corruption phenomenon, which we want to analyze and compare in our
paper? According to the table we can define it as corruption in commercial sector. In other
words, various companies, were such examples as officials bribing, documents falsification,
money laundering, tax evasion, insider trading, embezzlement may occur.
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Theories and Logic
From the corruption basics part, we got information about the general knowledge of the
corruption. In this section, we will try to focus on the business corruption in Russia and China
and find a number of theories which can support our analysis.
According to the background of corruption in Russia and China, both countries face corruption
problems. So first of all we need to find out why corruption problem exist, in other words, why
corruption activities happen in selected countries. In order to answer this question, we can use
two theories which may describe why and how corruption phenomenon occurs. One is the
rent-seeking model and another is agency theory.
Rent-seeking Model. In economics, “rent-seeking happens when an individual, organization
or a firm seeks to earn income by capturing economic rent through manipulation or
exploitation of the economic or political environment, rather than by earning profits through
economic transactions and the production of added wealth” (Tullock, 1967). “Rent”, means
benefit or profit or wealth. “Seeking” is defined as directly unproductive activities. So Rent
Seeking means the directly unproductive activities for wealth enhancing.
Rent Seeking is a powerful theory to explain the prevalence of corruption in many countries. As
the large number of rent-seeking activities appears, the more and more corruption is induced.
The typical example is a company gained franchise or competitive price from the government
through the rank-seeking activities (like bribery) to the government officer. Recently, lots of
rent seeking studies focus on efforts of obtaining special monopoly privileges, such as the
regulation of free enterprise competition from the government, although the term itself is come
of the more established practice of appropriating a part of production by obtaining ownership
or control of a land (Zou, 2007). The corruption related to Rent Seeking can be also called
“Rent-Seeking” corrupt behavior. Bribery is just one type of illegal Rent-seeking corrupt
behavior.
Rent-seeking behavior such as bribery shows the kind of corruption from “external” point of
view. The next theory, which is agency theory, will describe the problem inside the organization
and corruption practices from “internal”.
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Agency Theory. It is commonly known as the “principal-agent” problem. In political science
and economics, “the principal-agent problem or agency dilemma treats the difficulties that
arise under conditions of incomplete and asymmetric information when a principal hires an
agent, such as the problem that the two may not have the same interests, while the principal is,
presumably, hiring the agent to pursue the interests of the former” (Jenson & Meckling, 1976).
Diagram 1
This model describes a problem faced by a firm’s shareholders (principals), and the firm’s
management (agents). There are incentive problems between the two groups as well as
asymmetric information. Thus, the principals cannot directly observe the agents actions, and
that if the agent’s incentives are different from the principal’s, the outcomes would include
agents maximizing their own utility using the principal’s resources. This situation can easily lead
to the occurrence of corruption, especially when the principals’ supervision is not effective (Xu,
2007).
Agency Theory can be used as one of the analysis methods to explain the corruption in some
aspect. From the perspective of the agency theory, shareholders are “principals” and managers
are “agents”. Theoretically, managers should help shareholders wholeheartedly to manage the
company and try to make as much profit as possible for the shareholders. However, managers
are individuals. They are also concerned about their own benefit. When the income of corrupt
activities is much more than the cost and risk, they might have a corrupt motive. As they are
the actual executives of the company, they always know more about the company than
shareholders. So facing the temptation of the benefit, some managers might seek for their own
benefit at the expense of the shareholders.
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By using these theories, we may find some of the reasons for corruption behavior in Russia and
China. Nevertheless, these theories are surely not enough to support our research. Both
countries have their own features which can influence corruption. Such features as local culture
and the industry structure can obviously influence the way in which illegal activities are done.
In terms of culture, the most important aspect may be Guanxi theory in China, and “Blat” in
Russia.
Guanxi. Guanxi is a Chinese word which means “relationship” or “connection”. In China,
guanxi is a “core value in the society, which describes the basic dynamic in personalized
networks of influence” (Bao, 2008). In most basic way, guanxi means the personal relation
between two persons, were one can support another or be supported. “Guanxi” can also
describe a network of connections, which one can ask someone when something needs to be
solved, and through which he or she can influence on behalf of another person.
Up to now, “guanxi” is becoming more complex. It can describe a kind of general consensus
between people: “one is aware of another’s wants or needs and will take them into account
when deciding his course of future actions which concern or could concern another’s without
any specific discussion or request” (Zhai, 2009).
The relationships formed by “guanxi” are private and not tradable. When a “guanxi” network
violates bureaucratic norms, it can lead to corruption, and “guanxi” can also form the basis of
patron-client relations (Han, 2001).
“Guanxi” is a typical phenomenon in China; however such relations are also popular in other
countries. The “guanxi” in China, for example, is very much similar to what is called “Blat” in
Russia.
Blat. A term which appeared in the Soviet Union during the “deficit” times, when it was very
hard to buy certain goods without proper connections, buyer’s friendship with seller for
instance. So, to designate such useful “connections”, as well as the process of acquiring goods
in such a way, a word “blat” was used. The origin of the word is associated with the emergence
of foreign technicians in the industrialization period 1920-1930s. They were able to buy special
products, which were not for general sales, by presenting a special document on a sheet of
paper - "blat". Thus, the word "blat" was used to refer to informal networks of contacts,
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acquaintances, as well as purchases on the black market. Accordingly, “blatnoy” means a
person who gets into university or applies for a job by having connections, for example, friends
who advised him for a certain position.
To further analyze the culture influence on business corruption, we decided to use another
theory which can give general information on some cultural aspects in each country. The theory
is “Cultural Dimensions” by Greet Hofstede.
Cultural Dimensions. Hofstede’s 5 Cultural Dimensions (1980) is a kind of framework that
describes five dimensions of values perspectives between different national cultures. The five
dimensions are power distance, individualism, masculinity, uncertainty avoidance index and
long-term orientation. The Table 2 below shows the main idea of cultural dimensions.
Table 2
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Among 5 dimensions, the Power Distance (PDI), Individualism (IDV) and Uncertainty Avoidance
Index (UAI) are the most important indexes which can influence the corruption activities. For
instance, High PDI and low IDV index, which are the similarities of Russian and Chinese societies,
could enhance the possibility of the corrupt activities.
High power distance shows the high degree of inequality in the society. In fact, powerful people
may solve problem more easily in high PDI society, which could lead to the corrupt activity such
as bribery to the high power people for solving problems.
According to the diagram, society with a low individualism has a larger group and people take
more responsibility for each other's well being (Hofstede, 1980). Low individualism makes
people depend more on their relationship, which can explain the corrupt activities related with
“guanxi” in China and “Blat” in Russia.
Another theory which can help while analyzing corruptive behavior is Institutional theory. It is
used to describe the social structure, including rules, norms, routines, etc. The institutional
theory explains how these structures are created, implemented and changed according to time
and space (Powell and DiMaggio, 1991). What is necessary for our research is a part of this
theory, which is called institutional deficiency.
Institutional Deficiency. Theory of institutional deficiencies (TIDE) is suggesting that
relationship-based commerce will prevail where rule-based markets cannot flourish due to
institutional deficiencies (Martinsons 1998). Martinsons says that factors like personal
relationships (Guanxi in China, “blat” in Russia, etc.), are blurring the line between business-
government relations and informal information, which encourages and stimulates corrupt
activities.
Summary
Theories described in this section help us to analyze the corruption situation in Russia and
China. All theories are mainly divided in 2 groups. The first one explains why corrupt activities
happen (reasons and ways of corrupt activities). The other explains what influences corruption
behavior (indirect factors which encourage and stimulate corrupt activities, like cultural and
social structure).
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The rent-seeking model and agency theory are used to explain reasons for corruptive behavior
directly. The theories in cultural (guanxi, cultural dimensions) and institutional area
(institutional deficiency) are used to analyze the indirect factors which may influence
corruption. The chart below shows the structure of the theories for our research.
We feel necessary to stress that such structure is an example and is not necessary to be used in
the same way for further researches on the corruption subject. And may, off course, be
modified, updated and connected with other theories.
Diagram 2
The next section of our thesis is devoted to methodology were design and methods of
collecting and analyzing data are described.
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Methodology section
Design of the study
The aim of our study is to explore markets of Russia and China in terms of business corruption
and make a further comparison of the results. In other words it will be an exploratory research
which will provide comprehension and insights into the corruption phenomenon on two
different local markets.
We will use a mixed data collection method in order to collect as much and as varied
information as possible through both secondary and limited primary data collection. In our
study we will use both qualitative and quantitative analysis.
We would also like to mention that our group has representatives from both countries which
we selected for our analysis. We took it as advantage as we could divide our data collection by
focusing on native familiar markets, and thus making the whole research process more
productive and informative.
Sources selection
As it was mentioned before, we decided to collect as much data as possible and used various
sources, including private connections, sociological surveys and internet research. Further we
will explain more about each source and give such information as what kind of data was
collected and how, and why did we need that data.
For determining the levels of corruption in selected countries we used a number of datasets
compiled by organizations such as Business International, International Country Risk Guide,
Transparency International, and the World Bank. The most comprehensive measure that was
available to us was from Transparency International, known as the Corruption Perceptions
Index. This index compiles data from various secondary sources, to create a “poll of polls” in
order to generate the perceived level of corruption within a given nation. Fittingly, this index
touches on all forms of corruption, including business corruption, which is also necessary for
our cross-national comparison purposes.
Internet was one of the main sources for selecting case material. Various internet search
engines such as Yandex (yandex.ru), Rambler (rambler.ru), and Google (google.com) were used
during data collection on Russian part. As for Chinese market we mainly used Google
(google.com), Yahoo (yahoo.com), Sohu (sohu.com), and the searching functions of the New
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York Times and Financial Times websites. We would like to mention that It was impossible to
use some internet engines for Chinese part due to strict law and government regulations that
prohibit this kind of information to be revealed for average users (up to now Google search
engine is not allowed for use in China, our research was done while on the territory of Sweden).
English and Russian were the main languages for using key words and phrases as searching
criteria. If translated into English the examples of keywords and phrases will look as following:
Corruption in Russia, Corruption in China, Corruptive acts, acts of corruption, corruption
phenomenon, cases of corruption, corruption stories, business corruption, cases of bribery,
exchanging services, research on corruption, examples of corruption, corruption Guanxi, blat in Russia,
abuse of power, corruption practices…
With a help of Internet we were able to recover a number of cases from various online
newspapers (novaiagazeta.org.ru, kp.ru, ng.ru, novayagazeta.ru, gzt.ru, chinastakes.com,
newspapers.com, timesonline.co.uk, nytimes.com, thebigproject.co.uk, businessweek.com,
reuters.com and others), business and anti-corruption portals (msnbc.msn.com, 1tv.ru,
anticorruption-online.org, business-anti-corruption.com, gsdrc.org, oecd.org, transparency.org),
official organizations (china-court.org) and local social networks which were used for organizing
small surveys (vkontakte.ru, qzone.qq.com). When using online sources we carefully selected
the cases we found. The priority for case selection is described in the next section.
We were also able to get a database which covered a number of cases on the Russian market. It
was possible with a help of a private person who worked for an official organization and
decided to stay anonymous in our work. Cases collected from this source may be considered as
reliable information. During our research we found the same cases mentioned in online articles.
The only difference was that cases from the database were provided with a more detailed
description, like company’s location, type of corruption, consequences for the company.
Other sources of information were short sociological surveys, which were used for collecting
extra data and citizens’ opinion on corruption matter, for assisting the case analysis. These
assistant surveys had the same structure for both countries and contained several general
questions on business corruption issue and were organized with the help of friends, family
members and local social networks in Russia and China, such as Vkontakte and Qzone. The
software part of these networks allows a user to make a virtual group (community) with a
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group’s title, general information and a test form for example, which random users are asked to
complete (example of such technology can be observed on facebook.com). Firstly, random local
respondents were asked about their age and name. Secondly, they were asked to complete
several test questions (the surveys example can be found in the end of the document, in
appendix 1). Some respondents from the Russian social network seemed to be interested in our
research and even offered their help by providing us with additional information on several
cases on business corruption from their own experience. We don’t find data recovered from
our respondents very reliable but we tried to maximize its reliability by introducing rules for
choosing respondents and questionnaires. As far as respondents are concerned, we took only
those who clearly gave their name and age, were over eighteen years old and completed at
least 3 of the 4 given questions. The amount of respondents for our surveys was 50 people for
each country.
Case selection
We had several criteria for selecting cases in our study. They are the following:
o All selected cases report on corruption in Business sphere. As we already know there are
different types of corruption (See table on page 8). In our study we wanted to focus
mostly on business corruption (companies and other business structures). Cases on
political level were included when they were a part of business corruption phenomenon.
o We decided to collect cases which took place during the period 2003-2009. The reason for
this was a more systematic approach and a better standardization of gathered
information.
o In order to be included, a case report should cover as much information on the corruption
event as possible, including company’s background (name of the company, location etc.),
type of corruption, reason for a corruptive act, consequences for the company, sources of
the information mentioned in the cases.
Cases that did not provide enough information about these issues (or about at least most of
these) were not selected.
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Amount of data
We planned to collect at least 10 representative cases of business corruption for each country.
At the end of our research the whole amount of cases retrieved was 59 for Russia and 24 cases
for China.
Analyzing data
For Russia it was possible to make a quantitative analysis as far as a large amount of cases was
recovered. As far as all criteria for selection were followed, it was possible to standardize the
cases and show main tendencies, such as types of corruption performed; business areas were
corruptive acts took place etc. Nevertheless we also made a short qualitative analysis in order
to give a deeper cognition to the readers.
Because the amount of cases found for Chinese part was fewer than in Russia, it was possible to
make a limited quantitative analysis for China. It was decided to select 7 most representative
cases, from 24 found, to make a qualitative analysis by describing each of the selected cases
and give an in-depth study on corruption practices in Peoples’ republic of China.
The next section of our thesis will include research and analysis for the Russian market.
Research on business corruption. Russia
Presenting our research and results, we feel necessary to stress that we don’t reflect the overall
picture of the corruption in Russia and all its diverse aspects. The presented results characterize
only a part of corruption, while its scale is certainly underestimated.
For the Russian market we were able to find 59 cases of business corruption. According to this
amount it was possible to make a quantitative analysis for the study. With a help of “criteria for
cases selection”, described in the methodology section, we organized collected data in a form
of various diagrams. First a short description of all diagrams will be given and then the summary
of our analysis for the Russian market will be presented.
The first diagram we would like to present is the percentage of cases on business corruption we
were able to find from each source. A big amount of detailed cases was recovered from the
private database, which is marked on the diagram as “other sources”. Almost the same number
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of cases was recovered from the internet, various online newspapers and business and anti-
corruption portals. As it was mentioned in methodology section we were also able to get
several cases from our respondents, so they were also included in this diagram.
Diagram 3
The next diagram shows us which regulating functions an organization or an official body
carried out when caught for corrupt behavior. First place goes to organizations who work in
sphere of Supervising. Rest spheres “share” almost same places, except medical organizations,
which stand on the last place, having 5% of overall corrupt activity.
Diagram 4
The following diagram shows the percentage of types of corruption performed. As far as we can
see the diversification is clear. First place goes to cash bribes, and then we have exchange
services and gifts.
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Diagram 5
During the research we managed to find some cases where it was mentioned about corrupt
behavior but the act of corruption didn’t take place as legal authorities were involved. In other
words an official had an option between bribing and going to legal authorities for resolving the
problem. One of the examples of such cases:
“A company in the cosmetics industry was accused of violating applicable licensing
requirements. The stated fine for the violations was 70,000 rubles (1,700 Euro). A bureaucrat
told the company he would not refer the case to court if the company gave him a notebook
computer as a “present”. The company manager correctly concluded that good arguments
could be made against most of the claims in court, and it was a bad idea to create a precedent
for the bureaucrat to continually “eat at the company table”. As a result of the litigation, only
one of the five original allegations remained. The fine was reduced to 30,000 rubles. And in the
process, the company gained valuable experience in organizing its affairs. It no longer fears
auditors, because absolutely everything is above board. The manager acknowledged that
30,000 rubles was a fair price for this knowledge, and the situation would have been much
worse if the matter had ended with a banal bribe” (Satarov, Parkhomenko, Krylova, 2007).
Diagram 6
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Survey results. Russia
The picture below shows the result of the assistant survey in Russia. It will be helpful for the
following analysis in Russia and the comparative analysis of the two countries at the end of our
paper.
Diagram 7
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Analysis summary for Russia
We would like to notice that corruption in Russia takes a systematic form; it is more a rule than
an exception. During our research it was rather easy to find cases of corruption happened on
Russian market. The amount of data, which was collected, proves this fact. Various online
sources show that corruption practices are widely discussed not only in foreign but also among
local sources. A lot of online articles about abuses of power may be found by using Russian
internet search engines. Corruption in Russia seems to be an “open question”. Nevertheless it
still haven’t happened over the past 10 years, when a member of the government would have
officially resigned his duties under the pressure of public opinion, as it happened during the
corruption scandals in Israel, France, Spain, Germany or South Korea, India and Pakistan (ng.ru).
Another proof that local citizens are well informed of corruption phenomenon in Russia is that
some of our respondents, along with their feedback to our survey, were able to provide us with
additional cases in terms of business corruption.
According to the diagram four, we found that people or organizations in supervising area are
more easily to be corrupted. If the supervisor is corrupted, the supervision system will become
inefficient and the briber can earn benefit from it. The corruption condition of supervising
officer reflects the problem of supervision system in Russia. With the institutional deficiency of
the supervision system, the corruption in other areas follows. Licensing and law enforcement
are the other two main disaster areas, people working in these areas are corrupted for using
their rights to help the bribers get unfair competition advantage or avoid punishment.
Corruption in taxation and customs areas makes the bribers to avoid tax payment which causes
financial loss for the government.
As far as typology of corruptive acts is concerned, the research showed that every type of
bribery, according to Satarov and Parhomenko (2001), takes place in Russian Federation,
though mostly cash bribes were used in the collected cases, (diagram 5). Cash bribing is the
most direct way for solving the problem and local citizens know this. On the one hand it’s not
the safe way for doing business as one might be easily compromised, but on the other,
according to collected cases and general impression on corruption in Russia, people might not
be afraid of being punished. Moreover, as observed from the cases, companies’ officials were
directly speaking of a certain cash amount as a bribe, thus excluding the opportunity to use
other ways of bribing. According to Hofstede’s Power Distance Index (2008), Russia has a very
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high Uncertainty Avoidance Index (UAI). Though the society with high UAI tries to avoid
ambiguous situations, according to Hofstede’s Model (1980) it also has a “very formal business
conduct with lots of rules and policies” (mindtools.com). A powerful law structure with lots of
policies might be useful against corruption practices, but as far as a lot of cases of corruption
still happen that might, once again, prove the weakness of supervision system in Russia. The
other reason for corruption might be, because of the same “lots of rules and policies”, as
people would like to skip or speed up this step and thus stimulate corruptive behavior.
“Speeding up” process is very popular in Russia, judging from the cases, it is mostly used in
licensing sphere, and mostly “gifts” and “cash bribery” are accepted there.
There is another popular process in Russia, which is connected with “Blat” relations, which
were already described in methodology section. A similar to Chinese “guanxi”, “blat” model of
relationships also gives a wide range for corruptive behavior. Let’s see an example case,
recovered from the Internet.
An official, from a Russian Health-Care company and the customs officer were taken to the
court for illegal transportation of specialized medical equipment through the customs. Mr.
Klepnev was accused in taking bribes while on his official position as customs officer and also
helping his old friend who was working for medical organization in illegal transportation of the
goods from US. (forum.vch.ru)
As we could see from the diagram number six, quite a number of cases were solved legally.
That speaks for ability for anti-corruption measures. But unfortunately it still seems to be less
comfortable for officials to use legal ways for solving problems. And that is not just only
because of poor supervision system and management but also when a national culture and
mentality come into question. For example, since the ancient Russia it was usual to give so
called gifts for a good attitude and this is still relevant in these days (Bogdanov & Kalinin, 2001).
Another important remark would be that a large number of cases found were mostly from
private companies compared to state owned companies. Due to limitations we weren’t able to
see a decent difference between two structures. Except that supervision in state-owned
companies seems to be less effective than in private companies.
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The next section of our thesis will be devoted to research on corruption practices in Peoples’
Republic of China and results of our study for this market.
Research on business corruption. China
Same as for Russian part of research, by presenting the results of the study, we feel necessary
to stress that we don’t reflect the overall picture of the Chinese corruption. The presented
results characterize only a part of corruption, while its scale is certainly underestimated. The
approach of presenting data is different from Russia part, because fewer cases were found. We
will make a limited quantitative analysis on 24 cases, and select 7 cases for the qualitative
analysis.
The diagram 8 shows the percentage of cases on business corruption we were able to find from
each source. Most of the cases were recovered from the internet, 12 of them are from various
online newspapers, 3 of them were from business and anti-corruption portals, 5 of them were
found from the website of Chinese court. One was from academic articles written by other
researchers. Three cases were recovered with a help from our respondents.
Diagram 8
The diagram 9 shows the percentage of types of corruption performed in the cases. As far as
we can see the diversification is clear. First place goes to exchange services, and then we have
cash bribery and gifts.
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Diagram 9
Seven cases were chosen as the most representative cases because they are in different types
of companies and show corruption phenomenon in different spheres of Chinese society.
If we take ownership as the criteria, there are mainly four types of companies in China: state
owned companies, private companies, foreign companies, and joint ventures of domestic and
foreign funds. The cases presentation is ordered according to different types of companies the
corruption case happened in. State owned companies (see case 1, 2), private companies (case 2,
3), foreign companies (case 4, 5 and 6), and in case seven both state owned company and
foreign company are involved in. The presentation of each case includes its background and
further explanation according to theories.
Case 1: China Mobile case
According to an article in Financial Times, Zhang Chunjiang was removed from his post as
Communist party secretary and vice-president at China Mobile Communications. Mr. Zhang was
investigated for “suspicion of serious violation of discipline” (Patti Waldmeir, 2010). Zhang was
suspected of money laundering because of his loan and real estate dealings with his classmate,
Song Shicun. Mr. Zhang is the latest from the number of high-ranking executives and
government officials caught up in an intensifying Chinese crackdown on corruption (Patti
Waldmeir, 2010).
29,17%
49,66%
29,17%
Cash bribery Exchange service Gifts
Types of bribery performed in selected cases
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This is a typical case happened in state owned company. China Mobile is a large size and a very
famous company in China. And Mr. Shicun, who was a Zhang’s classmate, is a live example of
“guanxi” management.
Zhang was not only a business manager but also a government officer. He had specific personal
connections and business-government relations which were also important sources for his
illegal operations. Because Zhang is a top manager, this case is an example of Grand corruption
(see table 1).
Case 2: Small treasuries case
A common form of rationalized collective corruption, the setting up of ‘‘small treasuries’’, is
found in many large private and state-owned Chinese enterprises (Humphry Hung, 2008). This
is a kind of organizational corruption and it is different from corrupt acts by individuals. ‘‘Small
treasuries’’ (xiaojinku) are off book accounts being set up for the purpose of financing private
or even illegitimate expenditure of work units (danwei) (Wedeman, 2000, as cited in: Humphry
Hung, 2008). There are plenty of reported cases of off-book accounts, involving billions, not just
millions, of dollars. For example, investigations at 4,600 branches of the Industrial and
Commercial Bank of China and 1,700 branches of the China Construction Bank found that these
two Chinese banks had overstated their assets by RMB200 million (US$25 million) and run off
book accounts comprising another RMB200 million (Financial Times, 1999, as cited in: Humphry
Hung, 2008). Reports also revealed that the audits of some 112,000 state-owned and private
enterprises had uncovered off-book accounts amounting to 3.7 billion dollars and provided
some 1,400 clues on suspected cases (Humphry Hung, 2008).
This is a good example of principal-agent problem. Owners of the companies are principles and
the employees are agents. The employees and the owners of the company have different
interests, which caused the “small treasuries”. The employees’ incentives are different from the
company owners’, so the employees may be maximizing their own utility using the company’s
resources, such as setting up off-book account. This case is an example of centralized
corruption (top down), as interests are divided by senior officials and partly delegated to
subordinates (see table 1).
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Case 3: Huang Guangyu case
In 2008, China’s richest man, Huang Guangyu who was the boss of Gome, the biggest electronic
retail company of China was under investigation for alleged insider trading. In May 2010 Huang
was sentenced to be in jail for 14 years. Many of China’s self-made tycoons avoid the limelight,
being aware that their prominence could trigger retribution from officials who are jealous of
their rise to prosperity (timesonline.com).
Mr. Huang was questioned by police for alleged share-price manipulation linked to Shandong
Jintai Group, a drug manufacturer listed in Shanghai that is believed to be controlled by his
brother, Huang Junqin.
That is also a kind of “guanxi” operation because Mr. Huang’s brother is involved in. Insider
trading and share price manipulations usually happen in listed companies, security companies,
and banks. There are a lot of policies to control this kind of corruption, but inside trading and
manipulation can bring a lot of money to their operator, that’s why opportunism may drive
them to such illegal activities.
Case 4: Morgan Stanley’s case
Morgan Stanley is a global financial services firm headquartered in New York and operates in 37
countries around the world including China. In China it serves as an investment bank. The
former head of the Chinese subsidiary Morgan Stanley Real Estate is under investigation
because of his possible violations of the foreign corrupt activities.
According to an article, Morgan Stanley has been particularly active in the Chinese real estate
market. China’s real estate sector is rife with bribery and corruption. Minxin Pei also mentioned
this condition in his article. Consulting firms consent access to senior government officials and
preferential treatment in bids for land and projects in return for large “consulting fees” (Word
corruption report, 2009). “Unfortunately this kind of thing happens a lot in China but it is
unusual for an international company like Morgan Stanley to let it get directly involved,” said a
main investor of real estate in China who asked not to be named (Word corruption report,
2009).
This case happened in the specific business environment of China. In China the ownership of
land belongs to the government or we can say belongs to the public, there are some
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government institutions which have the right to rent it to the real estate companies for seventy
years, the renting fee is a main income of local government. In the 21st century the real estate
market is rising dramatically, the average price of each square meter of apartment is more than
10 thousand RMB in some metropolis. Now it is a big problem for China. Big amount of interest
encouraging corruption is inevitable. As we know, lot of government officials and employees of
real estate companies are involved in cases associated to land ownership. This condition could
have some influenced to the real estate market. And it is a phenomenon which is not exists in
any other countries.
Case 5: DPC Tianjin case
In 2005 a public report by the US Department of Justice claimed that a Chinese subsidiary of
US-based Diagnostic Products Corporation (DPC Tianjin) had paid approximately 1.6 million
dollars in bribes in the form of illegal ‘commissions’ to physicians and laboratory staff employed
by China’s state-owned hospitals and was accused of violating the Foreign Corruption Practices
(US Department of Justice, 2005, as used in: TI, Global Corruption Report 2009).
The medical care system has some problems in China. The institutional deficiency in this system
caused a lot of corruption cases. Chinese government made a lot of effort to control the price
of medical care. Nearly every kind of medicine has a highest price; no pharmacy shop can sell at
a higher price. But still in some state owned hospitals cases of bribery may happen when buying
medical equipment for example.
Case 6: Siemens case
Siemens’ three subsidiaries in China were involved in the unprecedented corruption case of the
company. The famous German company was pledged guilty in both Washington DC and Munich
on December 15 2008 and have to pay a total fines and penalties of approximately 1 billion
Euros for the bribing activities to government officials to get contracts in many countries since
1990’s (Leanne, 2008).
According to a statement of a claim referred by US Securities and Exchange Commission (SEC)
to the US District Court of the District of Columbia, from 2002 to 2007, the transportation
systems, power transmission and distribution and medical solutions divisions of Siemens (China)
bribed government officials and doctors to obtain governmental projects (e.g. the construction
of metro trains and signaling devices) and health-care contracts from state-owned hospitals.
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Siemens hired consultants to facilitate the bribery procedure through “off-the-books slush fund
accounts” and shell companies to their "partners" in China. SEC claimed that these consultants
served more as conduits for illicit payments and offered few legitimate services (Leanne, 2008).
Case 3, 4, 5 and 6 are examples of bribe “for a good attitude” (see table 1).
Case 7: Rio Tinto case
Rio Tinto is the “third largest mining and exploration company in the world, which based in
England and Australia. Chinalco is a state owned Aluminum Corporation in China. In February
2009, Rio Tinto and Chinalco announced the largest investment that the Chinese government
has ever made to a foreign company. But the deal was hindered because in Australia there are
some political opposition, some people begun to fear China's power in Australia”
(nytimes.com).
Tensions grew after the deal failed. In July 2009, four Rio Tonto employees including one
Australian citizen and three Chinese employees were detained by the Chinese government
because they suspect the employees were involved in espionage, stealing state secrets and
harming the nation's economic interests and security activities. A Chinese prosecutor handed
down indictments on February 10th 2010 against the employees, and charging them for
accepting bribes and stealing trade secrets.
But at the end there were no charges of espionage, because under China's state secrets law the
espionage charges are difficult to defend. Because of this case, the government added some
new prescripts to control espionage problems in 2010.
As the New York Times argued, “the case has caused a furor among Western companies in
China, raising fears that other executives could be accused of bribery or arrested because of
commercial disputes with Chinese companies” (nytimes.com).
In our opinion, case 5, 6, and 7 are rent seeking activities. This kind of rent seeking activity
provides more interests to foreign multinationals but harms business environment. Rent
seeking activities are costly to growth because they prevent innovations and are self-sustaining,
since such activities are more attractive, compared to productive activities (Yan, 2004). Case
seven is an example of international corruption (see table 1).
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Survey results. China
The picture below shows the result of the survey in China. It will be helpful for the following
analysis in China and the comparative analysis of the two countries at the end of the paper.
Diagram 10
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Analysis summary for China
According to the explanation for the cases, there are several points which can explain the
condition of business corruption in China.
Guanxi is the most important relationship in Chinese culture
As mentioned in the case, “guanxi” is the base for the relationships between Chinese people
and it has already become a part of Chinese culture. It is believed that any problem can be
solved by “guanxi” and solving problem through the relationship and nepotism is normal and
reasonable (Han, 2001). The simple help or co-operation becomes useful and even tradable and
this is when corruption comes out.
The nepotism behavior may be observed in the “Huang Guangyu” case, were Huang’s brother is
involved. In “China Mobile” case, Song Shicun, the important partner of Zhang Chunjiang, is his
classmate.
From the cases we can say that people with “guanxi” relations are more trusted when it comes
to corruption. Such relations may stimulate and encourage corruption practices; people find it
easier to bribe, and cover each other, while sharing the benefit. In Chinese culture, people are
caution and tend to use indirect ways in the corrupt activities. As have been seen in the
question 4 of the survey, Chinese prefer gift and service exchange than cash bribery, because
cash bribery is concerned to be more risky and easier to leave evidence. Usually, Chinese are
very careful, first they try to establish “guanxi” relations and then “cement” it. Although it may
take a lot of time and invisible expense, they will not start to co-operate until they feel the
“guanxi” is steady enough (Bao, 2008).
Institutional Deficiency of the state-owned enterprises
Guanxi plays an important role, but only guanxi cannot explain the business corruption in
China. Guanxi is the internal reason of the business corruption, there is also external reason,
which can be explained by institutional deficiency.
In Martinsons’ theory (1998), the development of relationship-based e-commerce in China has
resulted from that country's lack of trustworthy and enforceable set of rules for doing business.
The structure of state owned company in China is a very important point of institutional
deficiency. In China, most of the large enterprises are state-owned or partly state owned. As
the data from the Fortune magazine says (Fortune 500 Enterprises, 2009), there are 32 Chinese
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enterprises in top 500 enterprises in the world and all of them are state-owned. State owned
companies are competitive and strong in general, however still they have their problems such
as principal agent problem and inefficient supervision system.
Principal-agent Problem. The state-owned companies belong to the government, and all the
staff in the company work for the government but not the share holder, which means that
there is no clear principal. As mentioned in the literature review, when the income of corrupt
activities is much more than the cost and risk, the temptation of the benefit and asymmetric
information will stimulate managers to seek for their own benefit at the expense of the
shareholders. The employees (agents) in state-owned company could try to use their position
and rights to earn benefit for themselves, like “small treasuries” in Case 2.
Furthermore, as the government is just behind the state-owned companies, managers may
establish relationships with the government more easily. Like the “China Mobile” cases, Zhang
Chunjiang is not only a manager of the company, but also a government officer. He has a lot of
shared recourses and “guanxi” relations with government, which helps him earning “extra”
revenue.
Lack of effective supervision system. It is very important to have a good supervision system to
limit opportunities to perform corruptive acts. But unfortunately, according to institutional
deficiency, Chinese system is not quite effective at the moment, neither in internal or external
supervision. Without effective supervision, the Principal-agent problem becomes more serious.
According to the agency theory, managers (agents) always know more information than the
shareholders (principals) as they are the actual executives of the company. In the private
companies, internal supervision is usually handled by main shareholders. However, in terms of
the state-owned companies, the only main shareholder is the government, which causes the
inefficient supervision. And for a manager, the procedure of making decision is not transparent
enough. So there is lower risk than usual for corrupt activities. If a manager or a government
officer wants to corrupt or be corrupted, it could be much easier than in private companies. In
“China Mobile” case, lack of supervision made Mr. Zhang to misuse a large sum of money.
Rent Seeking and corruption of foreign companies in China
Foreign corruption is becoming a more and more serious problem recently (Chen, 2009). In the
new round of FCPA (Foreign Corrupt Practice Act) investigation from the United States, a lot of
famous foreign corrupt cases like “Siemens” case, “Lucent” case and the recent “Rio Tinto” case
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happened in China. China becomes a corruption-prone area for the foreign companies (Chen,
2009). There is a number of reasons for this.
The first reason is the social environment in China. According to the survey, 68% of respondents
think that business corruption is a common phenomenon in China. As mentioned before, the
corruption happened widely in local companies. This kind of environment encourages the
foreign companies to some extent.
Secondly, foreign companies face more and more serious competition in China, including the
competition from the local state-owned companies and the other foreign companies. In some
cases, the state-owned companies may have advantage, which is kind of unfair competition
because of the government’s resource, just as the Rent seeking model describes. The pressure
of competition stimulates or forces some of foreign enterprises which are trying to use some
“unproductive activities” to earn more profit and keep low competitive level. As mentioned
before, bribery is a typical illegal rent-seeking activity. The “Rio Tinto” and “Siemens” case are
good examples. In Rio Tinto case, bribery is used for getting private information from the
government, which could help them earn advantage in negotiation.
Thirdly, there is no effective supervision in the government and imperfect law for restrictions.
According to the analysis, we may conclude that it is not a coincidence that lots of big foreign
corruption cases happened in China. For Chinese government it is really a shame that almost
none of the cases were discovered by Chinese authorities but the US supervision system (Chen,
2009).
Invisible bribe and the imperfect law in China
In China, people use lots of different ways to bribe. According to the survey, we found out that
only 21% think that the main type of bribery is cash bribery; most people think that service
exchange, gifts and other kind of bribes are the main ways of bribing in China.
Cash bribery is the most direct way. It is also very risky and might leave evidence easily. As for
the analysis in cultural dimensions, China’s UAI (Uncertainty Avoidance Index) is very low which
means that Chinese people don’t want everything to be hundred percent clear. Compared with
cash bribes, using other ways of bribing are much safer.
At the same time, the law in China is imperfect; some kinds of corruption are very difficult to
judge and some are not even covered by the law. People use the leaks of the law system and
might not get a “full” punishment, even if their corruptive behavior was exposed.
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In one word, there are many reasons for China’s current situation in terms of the business
corruption. China has the prevalent problem which appears in many countries in the world,
such as rent-seeking and principal-agent problem. However China also has their peculiarities,
like culture and the structure of the government and companies, which obviously have an
impact on corruption practices. It can be seen more clearly if we compare China with Russian
Federation in the next and the last section of our thesis.
Comparative analysis results
After the separate analyses were done for the Russian and Chinese markets, we got a general
idea of the situation and main features of the business corruption in both countries. We think
that in terms of our research the data we gathered is enough to present first comparative
analysis results. We will also present the results of our surveys in the end of this section.
As mentioned in the literature review, we use a multidimensional way to analyze the business
corruption phenomenon. According to the analysis, culture and economic structure play a very
important role and have great impact on corruption in business sector in Russia and China.
Obviously, “guanxi” is one of the most important features in Chinese Business corruption
practices. A high percentage of cases in China are related with “guanxi” relations. Russia has the
similar “blat” relations, which are also used in a number of cases, but not as much, compared to
China.
The diagram below shows the comparative result according to Hofstede’s cultural dimension
model. China, along with Russia has a very high Power Distance, quite low Individualism and
low Uncertainty Avoidance Index, which is three times higher in Russia.
Diagram 11
0
20
40
60
80
100
120
PDI IDV MAS UAI LTO
80
20
66
30
118
93
39 36
95
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MASTER THESIS A Comparative Analysis of Business Corruption in Russia and China 5/27/2010
China and Russia have the similar high power distances (China 80, Russia 96), which shows a
high degree of inequality in both countries. It is a very important reason for the “popularity” of
corruption in Russia and China.
In terms of individualism, China has a very low IDV (20), while Russia is a bit higher (39). It
shows that in China people depend more on each other compared to Russia. Chinese rely on
“guanxi” in almost every aspect of life and are long-term oriented in terms of such relations,
while “blat” in Russia is also important but people are more likely aimed for short-term
relations.
As far as Uncertainty Avoidance Index is concerned, China has a very low UAI (30), compared to
Russia (95). The high uncertainty in Chinese society leads to the high power distance because
the rules are not effective for limitations and there is no “clear” collective truth. The opposite
situation is observed in Russia, the UAI index is 3 times higher there and that means Russian
market has very formal business conduct with lots of rules and policies. But at the same time it
might not make much difference with China in terms of corruption levels, because with a lack of
supervision law system might not work properly. Moreover a big amount of policies and
obligations may cause willingness for “speeding up” the processes or finding “shortcuts” and
thus stimulate overall corruption behavior.
In terms of economic structure, both countries have the similar history of planned economy
and state-owned enterprises. Though, with time there was a drastic change in the Russian
structure of enterprises, while China keeps the state-owned structure. According to the
analysis, China faces a more serious principal-agent problem compared to Russia, as far as in
the most cases the “principal” is the government itself. And the supervision systems in state-
owned companies show less effectiveness than in private companies.
Comparative results of the surveys study
As mentioned in the methodology section, we made a survey in order to get additional
information on citizens’ opinion concerning business corruption practices in Russian Federation
and People’s Republic of China. We decided to make a comparative study of the survey results
in this section to show more comparative features which can be explained using our study.
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MASTER THESIS A Comparative Analysis of Business Corruption in Russia and China 5/27/2010
Diagram 12
Though the Law system in China prohibits such data on corruption to be exposed, Chinese
respondents, along with Russian side, seem to be well informed about corruption practices and
think that corruption is a common phenomenon. As for Russian Federation, the survey’s results
prove that question of corruption is widely discussed.
Diagram 13
In question 2, we found that only few respondents in China (10%) and Russia (12%) have never
participated in corruptive activity. The results are quite interesting because of the number of
respondents who refused to answer. Compared with Russia (24%), over 40% of Chinese
respondents refused to answer; the Chinese seem to be much more caution and conservative
about corruption matter. Half of all respondents from both countries answered that they
participate in corrupt activities.
0%
20%
40%
60%
80%
Yes No I don't know
68%
24%
8%
79%
17%
4%
Question 1. Do you think corruption practice in business sphere is a common phenomenon in your country?
China
Russia
0%
20%
40%
60%
Never Yes, I do.Rarely
Yes, I do.Often
Refuse toanswer
10%
26% 22%
42%
12%
46%
18% 24%
Question 2. Have you ever tried giving bribes/gifts? If yes, how often does that happen?
China
Russia
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Diagram 14
Our results show that in Russia the main reason for bribery is “speeding up” the process while
Chinese people focus more on earning advantage in competition; which is a specific and
important feature of Chinese society.
Diagram 15
In terms of the ways of bribing, Russian respondents seem to prefer using direct and indirect
cash bribes, while a majority of Chinese respondents may consider cash bribing very risky, and
prefer using other kinds of bribery, such as services exchange and gifts. As known from our
study, when “guanxi” relations are involved, cash bribes may be concerned less risky for
Chinese people.
0%
10%
20%
30%
40%
50%
60%
Speed upprogress
Getadvantage incompetition
Long-termattidude
Other
21%
46%
25%
8%
57%
10%
20% 13%
Question 3. What is your reason for giving bribes/gifts?
China
Russia
0%
10%
20%
30%
40%
50%
Cash Exchange services Gift or other non-cash benefit
21%
46%
33%
47%
40%
13%
Question 4. What is the main type of bribe for You?
China
Russia
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MASTER THESIS A Comparative Analysis of Business Corruption in Russia and China 5/27/2010
Our surveys might be proved useful as far as same tendencies from our studies can be
concluded. Such as corruption is thought to be widely spread in both countries; Russian citizens
are more likely to discuss corruption practices, compared to Chinese; it is popular to use cash
bribes in Russia, and in China same way of bribery seems to be less used.
Conclusion
According to the results, separate analysis and comparison of the business corruption in Russia
and China, we have an overview of the corrupt situation in these two countries.
We find out the reasons of the corruption problems in Russia and China. Rent seeking is a very
important one of the corrupt practice. Bribery, the important part of corruption, is a kind of
rent seeking activities. Principal-agent problem also plays a primary role in the corruption
sphere. It describes a problem between owners and managers inside the company which is able
to cause internal corruption.
We also realize that other factors of the society may greatly influence the corruption practice,
such as culture and structure. “Guanxi” have a great impact in the corruption in China. It is one
of the necessary conditions of the corrupt activities in China. At the same time, guanxi will help
to enhance the success rate and reduce the risk of the corrupt practice, so does “Blat” in Russia.
High power distance and low individualism of the two countries stimulate the corrupt activities
in a sense. The leak of structure, which is a kind of institutional deficiency, will leave more
opportunities to the corrupt practice.
From the comparative analysis, we summarize the similarities and differences of the corruption
situations between Russia and China. We find that different culture and structure make the
difference of corruption. Like the different UAI index can explain the difference of the bribing
way between China and Russia which Russians prefer cash bribery while Chinese tend to avoid
it.
In a word, business corruption in China and Russia is a problem which cannot be ignored. In this
paper, we’ve showed some features of the corrupt activities in these two countries. We hope
that our results may be proved helpful for further researches on this problem. What we also
expect is that our work could let business managers get a decent knowledge on corruption
situation and help them in organizing business in Russia and China.
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Further research
Because of the limited time and resources, a rather low number of detailed cases was collected
and results for our research may not reflect the overall picture of business corruption on
markets of Russian Federation and People’s Republic of China. The presented results may
characterize only a part of corruption, while its scale is certainly underestimated.
A further research has to be made in order to get a more complete picture of corruption
phenomenon in selected countries. For that purpose the further studies should be done with
more rigor to avoid just exploratory character of the study and should also widen the frames
for corruption and include, along with business sphere, political and state level, in order to see
connections among different types and spheres of corruptive behavior.
The theory model we used in our study might be also changed due to different study
approaches and be updated with extra theories that might have connections with corruption
activities.
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Appendix 1. The Survey Example
Thank you for participating in our survey. This survey is used for analyzing the current situation of
business corruption in China/Russia and is meant for citizens of Russia/China only. Business Corruption,
as the name suggests, means abuse of power for private benefit or unfair competition when doing
business. It includes all kinds of corruptions in sphere of business.
Your Name:
Your Age: 18-25 26-40 40-60 Over 60
Question 1: Do you think a corruption practice is a common phenomenon in your country?
Yes
No
I don’t know
Question 2: Have you ever tried giving bribes/gifts? If yes, how often does that happen?
Never
Yes, I do. Rarely
Yes, I do. Often
I don’t want to answer this question.
If you answer “Yes” in the Question 2, please answer the following questions.
Question 3: What is your reason for giving bribes/gifts or offering service exchange?
Speed up progress
Get advantage in competition
Long-term attitude
Other
Question 4: What is the main type of bribe for You?
Cash
Exchange services
Gift or other non-cash benefit
Thank You for your time. If You have any questions or suggestions please contact us.