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  This module is a resource for lecturers  

 

Consequences of private sector corruption

 

A vast body of literature focuses on public sector corruption, but there is very little systematic analysis of private sector corruption (Argandoña, 2003; Gopinath, 2008). International anti-corruption efforts have also mostly focused on public sector corruption (Sööt and others, 2016). This makes it difficult to estimate the exact cost of private sector corruption, although it is clear that private sector corruption has serious and lasting impacts on the economy and wider society.

The occurrence of private sector corruption is reportedly high. According to the Global Economic Crime and Fraud Survey 2018 by PricewaterhouseCoopers, 28 per cent of the companies that reported internal corruption in the last two years noted that they had suffered from business misconduct, and 45 per cent said they had suffered from asset misappropriation. A World Bank's Enterprise survey, which measures the incidence of bribery in companies, shows that in some countries up to 51 per cent of all firms experience at least one bribe payment request per year. Private corruption affects the entire supply chain, as it distorts markets, undermines competition, and increases costs to firms. It prevents a fair and efficient private sector, reduces the quality of products and services, and leads to missed business opportunities (UNODC, 2013b).

Even if we adopt the position that the primary goal of business is to increase wealth or profits, using corruption to maximise profit will generate negative effects for the company, such as decreased employee morale, reduced productivity, loss of shareholder and investor confidence, and damaged reputation and business relations. Companies also have to bear the costs associated with investigation and remedial action (Lee-Jones, 2018). A few of these impacts are explored below. Conversely, in many contexts, "higher levels of firm integrity correspond with stronger commercial performance" (U4, 2017). Furthermore, according to the United Nations Global Compact website:

There is growing understanding - especially by business leaders and investors ahead of the curve - that it is not enough for companies to concern themselves only with short-term profits because natural disasters, social unrest or economic disparity can damage long-term prosperity. The businesses that understand this challenge and take action will be a step ahead.

Below are some of the ways in which private sector corruption erodes economic development and investment:

  • Unfair competition: The company offering the bribe gains an unfair advantage over its competitors, whose products and services will not even be considered (Boles, 2014). While some companies pay bribes to gain advantages, others may be unwilling or unable to do so. Thus, corruption undermines competition because companies that refuse to pay bribes will likely be excluded from the market.
  • Inflated costs: The lack of competition caused by corruption can result in higher prices and poorer quality of goods and services, ultimately harming the consumers (Lee-Jones, 2018). For example, a company already paying bribes to sell its products may consider it unnecessary to invest in innovations, new technologies, training of personnel and other activities that could improve its productivity and quality of services or products.
  • Societal impact: Business corruption can have devastating impacts on the environment and human rights (Martini, 2014). For a detailed discussion on how corruption affects human rights, see Module 7 of the E4J University Module Series on Anti-Corruption.

For a more comprehensive discussion on the diverse effects of corruption, see Module 1 of the E4J University Module Series on Anti-Corruption.

 
Next: Causes of private sector corruption
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