a comparative analysis of business corruption in russia ...327605/fulltext01.pdf · 2 | p a g e...

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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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MASTER THESIS A Comparative Analysis of Business Corruption in Russia and China 5/27/2010

“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

http://en.wikipedia.org/wiki/Non-governmental_organization

http://en.wikipedia.org/wiki/Non-governmental_organization

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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).

http://en.wikipedia.org/wiki/Satire

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http://en.wikipedia.org/wiki/Novel

http://en.wikipedia.org/wiki/Nikolai_Gogol

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http://en.wikipedia.org/wiki/Anecdote

http://en.wikipedia.org/wiki/Alexander_Pushkin

http://en.wikipedia.org/wiki/Comedy_of_errors

http://en.wikipedia.org/wiki/Comedy_of_errors

http://en.wikipedia.org/wiki/Greed

http://en.wikipedia.org/wiki/Political_corruption

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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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http://en.wikipedia.org/wiki/Economic_rent

http://en.wikipedia.org/wiki/Profit_(accounting)

http://en.wikipedia.org/wiki/Wealth

http://en.wikipedia.org/wiki/Regulatory_capture

http://en.wikipedia.org/wiki/Coercive_monopoly

http://en.wikipedia.org/wiki/Capitalism

http://en.wikipedia.org/wiki/Competition

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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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http://en.wikipedia.org/wiki/Economics

http://en.wikipedia.org/wiki/Information_asymmetry

http://en.wikipedia.org/wiki/Principal_(law)

http://en.wikipedia.org/wiki/Agent_(economics)

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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

20 | P a g e


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

http://en.wikipedia.org/wiki/Financial_services

http://www.worldcorruption.net/tag/bribery/

http://www.worldcorruption.net/tag/corruption/

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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

36 | P a g e


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

37 | P a g e


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.

38 | P a g e


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

39 | P a g e


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.

40 | P a g e


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

41 | P a g e


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

42 | P a g e


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.

43 | P a g e


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.

44 | P a g e


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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.

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