Corruption is something that we read about in the press on an almost daily basis. In February 2017 massive anti-corruption demonstrations in Romania became world news after the Romanian government had decided to decriminalize several types of corruption, such as corruption cases that resulted in financial damages below 45.000 Euros. Shortly after the newly elected Romanian government signed the new decree on decriminalizing corruption, hundreds of thousands of Romanians took to the streets across the country for mass protests. After five days of protests and with even bigger manifestations planned for the following days, the Romanian government finally decided to go back on its own decision. Although corruption in the public arena is not something that only happens in Central and Eastern Europe – we have for instance seen many allegations of corruption in the 2017 French presidential campaign and President Park of South Korea was impeached in March of this year following bribery accusations – the region, as many other emerging markets, is known for an array of problems linked to corruption practices.
Our paper focuses on a very specific role of corruption; we look into the role of host-country corruption in private participation projects in emerging markets. These projects are a type of public-private partnership in which the private sector is involved on a contractual basis (e.g. contractor) whereas the responsibility of the project remains with the public sector. These types of projects are encouraged in many countries nowadays. In emerging markets there has been a significant increase in private ownership projects in infrastructure development. However, previous studies have largely overlooked the influence of corruption in these types of projects and tend to neglect the emerging economies in Central and Eastern Europe. We therefore focus on 1185 private ownership projects that took place between 1997 and 2013 in 18 Central and Eastern European Countries to study the influence of corruption on the success of these projects.
Our results show that the level of host-country corruption is associated with the probability of failure; as the level of corruption increases, so does the probability of the project failing. Another finding was that the negative effect of corruption in these projects could be downplayed if local investors are included in the ownership structure of the project because these local actors have a better understanding of the market. We also studied if publicly traded projects (a common strategy for dealing with corruption) would have fewer problems with corruption in Central and Eastern Europe but we did not find any evidence for this. This shows that some strategies for coping with corruption do and others do not work in Central and Eastern Europe.
These results are relevant for companies that are going to participate in private participation projects in emerging markets in general and in Central and Eastern European markets in particular as they provide valuable insight into potential ways of reducing the effects of corruption in these often large-scale projects. Since these markets are growing, there is likely to be an increase in these kinds of projects in the coming years. As corruption can have legal, financial and brand image consequences, companies can benefit from adopting the right strategy for dealing with corruption.
Jiménez, A., Russo, M., Kraak, J. M., Jiang, G. F. “Corruption and Private Participation Projects in Central and Eastern Europe.” Management International Review (2017), http://link.springer.com/article/10.1007/s11575-017-0312-4