Firm Networking and Bribery in China: Assessing Some Potential Negative Consequences of Firm Openness

Abstract

Economic openness, both in terms of increased international trade exposure and enhanced inter-firm networking, has been a key element of China's economic emergence since the implementation of market reforms and the ''opening-up policy'' over 30 years ago. Unfortunately, these changes have also coincided with the increased incidence of bribery and corruption. Both in general, and in the specific context of China, research on the relationship between a firm's tendency toward openness and its propensity to engage in bribery is scarce. This study seeks to fill this gap based on empirical evidence provided by a large sample of Chinese firms. The findings of the study reveal that firms' increased networking and openness tend to occur contemporaneously with greater bribery and corruption. We suggest that this may be due to the misuse of guanxi-based networks that coincide with the presence of firms' open network strategies, heightened by the potential loss of resource and capability heterogeneity (and hence reduced competitive advantages) in the context of openness. We further find that firms paying bribes do so as an attempt to overcome unnecessary bureaucratic processes and ineffective institutional support that might tend to hinder their development.

Firms’ innovation embedded in their networks of collaboration: China compared to the world

“…Indeed, the strengthening of property rights is one of the recommendations in the OECD economic survey of China (OECD 2013). In the same way, studies by Hu and Jefferson (2009) and by Huang and Rice (2012) highlight bribery and weakness of contractual law and intellectual property rights as major impediments in China.…”

“…Also, the strong role of government is emphasized as particular to China, where the government may direct firms' R&D processes. While this central steering from the Chinese government may focus critical masses of resources and expertise, other arguments are made that the central control is often very bureaucratic and hampering flexibility and speed in the innovation process (Huang and Rice 2012;Nam et al 2014).…”

Equity Incentives and Corporate Fraud in China

“…Despite major improvements in their legal framework, corporate fraud in China continues to be widespread, potentially hindering economic development (Tian, 2008;Huang and Rice, 2012). Chinese-listed companies are well known for behavior such as inflating profits, creating fictitious transactions, and making false disclosures (Chen et al, 2006).…”

Performance implications of ties to large-scale state-owned enterprises and banks in an emerging economy

“…First, China has a long tradition of relying on social ties (guanxi) to conduct business (Huang & Rice, 2012;Luo, 2002;Peng, 2003). Second, China's dual approach to its market transition has led to the establishment of large-scale SOEs and state-controlled banks to operate in the marketplace (Luo, 2007;Peng, 2003).…”

“…Therefore, we can compare the relative value of ties to large-scale SOEs and ties to banks across different organizational contexts. Fourth, China is the second-largest economy in the world, and understanding its unique characteristics is of interest to firms in both mature economies and EEs (Acquaah, 2007;Gu, Hung, & Tse, 2008;Huang & Rice, 2012).…”