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Recent economic geography research has identified the round‐tripping of capital from emerging economies to offshore financial centers (OFCs) and back as foreign direct investment (FDI) as a central element of the global offshore FDI network. However, the factors behind this phenomenon are not yet fully understood. Our study develops a general framework that conceptualizes the phenomenon of round‐trip investment. In particular, we argue that secrecy arbitrage, defined as interplay of onshore corruption and offshore secrecy, largely explains round‐trip investment between onshore jurisdictions and OFCs. First, we argue that part of the round‐trip FDI consists of proceeds from corruption, which is laundered in OFCs and reinvested back to the location of origin. Second, we maintain that the secrecy dimension of the OFC also motivates the round‐tripping of licit capital, as businesses use the secrecy provided by OFCs to hide their true identities from corrupt authorities in the home location. To test the validity of our argument about onshore corruption as a driver for round‐trip investment, we empirically analyze firm‐level data on the distribution of offshore FDI (which, we argue, is largely round‐trip) across Russian regions. Our empirical findings confirm that FDI from OFCs is positively associated with host region corruption, and this relationship is stronger for OFCs with a higher secrecy score. Hence, we conclude that round‐trip FDI is strongly motivated by the interplay between onshore corruption and offshore secrecy.

This article addresses corruption as a negative practice displaying the ‘darker side’ of social capital in Chinese guanxi and Russian blat/svyazi networks. It presents a conceptual framework integrating several research streams to establish a conceptual linkage between social network characteristics and three forms of corruption between business persons and public officials: cronyism, bribery, and extortion. We argue that the forms of corruption in a society are determined by the nature of social network ties and their underlying morality, with particularistic and general trust being key factors. Our framework depicts networks as three concentric circles representing three types of corruption resulting from their corresponding types of reciprocity: open, closed, and negative. We then apply the framework to the practice of guanxi in China and blat/svyazi in Russia. We propose that different network characteristics and different forms of corruption may help explain what we label the ‘China-Russia paradox’ of why corruption and high economic growth have co-existed in China, at least in the short term, but less so in Russia. We conclude with ethical and legal implications for doing business in those two transforming economies and offer suggestions for future research.

PurposeThe purpose of this paper is to show how the institutional context in an emerging economy, Russia, moderates the “do or buy” decision of international firms operating in the country. This is examined through the influence of institutional voids on transaction costs and definition of core competencies.Design/methodology/approachThe paper adopts a qualitative research approach, where the empirical data are based on interviews with executives of eight Finnish companies, which have invested in Russia's second largest city, St Petersburg.FindingsThe key findings include first, that the formal and informal constraints in the Russian business environment influence outsourcing decisions in terms of increased transaction costs, and in terms of resources needed to be competitive. Second, the authors show that, due to these constraints, a firm in Russia may need to insource functions that it would otherwise outsource as non‐core activities and invest in building of competencies specific to the Russian business environment.Research limitations/implicationsThe limitation of the study is its focus on two countries. However, the analytical framework proposed for examining influence of institutions on outsourcing strategies is applicable to other country contexts.Practical implicationsThis paper shows how the institutional constraints of the host country, reflecting in this case as underdeveloped market for business services and complex state regulation, can result in a significant need for adaptation of a foreign firm's business processes. This must be taken into account in business planning and allocation of resources to the Russian operations.Originality/valueThe paper provides researchers and practitioners with new information about a little‐studied topic by showing concrete ways of how institutions influence outsourcing strategies in Russia.

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