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Rotman Insights Hub | University of Toronto - Rotman School of Management

Do firms ever benefit from bribery?

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Stefan Dimitriadis

It’s an illegal practice, but a new study suggests there are extreme circumstances when bribery can improve business performance — at least in the short-term.

The research, which analyzed businesses during the multi-year Boko Haram insurgency in Nigeria, indicates that during times of conflict, when corrupt public officials are less able to threaten firms, businesses that engage in bribery to access resources such as electricity and transportation fare better than those that don’t.

While making clear that bribery typically comes with negative long-term effects, the study — published in Strategic Management Journal — provides important context for why businesses might resort to the illegal activity in times of extreme conflict.

“What this paper shows is that under certain circumstances, when the rule of law falls apart and firms are caught in the midst of pretty extreme violence, bribery can actually be an important resource,” says author Stefan Dimitriadis, an assistant professor of strategic management at the Rotman School of Management. “At least in the short run, while things are haywire, it can be helpful for firms.”

The paper looked at data from small- and medium-sized local businesses during the Boko Haram insurgency between 2009 and 2014. The radicalized Islamist group carried out violent attacks on the Nigerian state and those it believed were aligned with Western cultural influences.

By combining data on the location of Boko Haram attacks, a wide-ranging survey of firms conducted by the World Bank (which included questions on business challenges), and interviews with businesses owners and managers, the paper estimated how exposure to attacks affected firm performance and how bribery moderated that effect.

The research indicates Boko Haram attacks decreased firms’ annual sales on average by 10 per cent, but bribery reduced the negative effects of the conflict to the point where bribing firms experienced nearly no loss in sales.

Notably, the study differentiates between two kinds of bribery: bribes that involve extortion by officials — which provide little benefit to the business — and bribes that are made to gain priority access to resources.

Part of the reason bribery seemed so helpful for firms in the study was because there was less extortion going on during extreme conflict and businesses were specifically bribing to gain access to resources, Dimitriadis says.

“Instead of it being this payment to get rid of a predatory official, [bribes] became a way for firms to access basic services that had become very scarce during those times,” he says.

Long-term, there’s plenty of evidence that firms engaging in bribery eventually won’t have funds to invest in themselves, which in turn leads to challenges growing a business, says Dimitriadis. A firm might also develop a reputation for bribing, which can lead to issues down the road, particularly if unscrupulous officials take advantage of it.

The issue of bribery by large multinational companies — which were not part of the study — involves different considerations, Dimitriadis says.

Multinationals and sizeable organizations with good leadership might be able to avoid bribery by having a strong sense of ethics and good governance that discourages the activity, Dimitriadis adds. For smaller firms, strong ties to communities can help guard against bribery as residents might work to protect businesses in times of conflict.

“In theory, there are alternative mechanisms of resilience that are not illegal,” he says, adding, however, that times of extreme conflict can test even strong community ties.

The study notes that it’s unclear what the findings would be in situations where the rule of law is more stable, corruption is less prevalent, and the state is not targeted by armed conflict.

Bribery also likely would not benefit firms in more developed settings, even during times of crisis or armed conflict, the paper notes. That’s because there would likely be regulatory agencies monitoring businesses and enforcing laws that would make it less likely that businesses could get away with bribery.

As a result, extrapolating from the study’s findings can be hard since it deals with a very specific set of circumstances during a time of great upheaval, Dimitriadis says. However, the paper does lend to broader knowledge on why bribery occurs in the first place.

“It's trying to contextualize and explain why we often see managers in tough situations, and in settings of conflict and violence and poverty, engage in bribery. It's a means of survival for them,” he says. “I don't think we can take away from that that it's a good thing to bribe; I think this paper does shed some light on why bribery is so widespread.”

Stefan Dimitriadis is an assistant professor of strategic management at the Rotman School of Management.