Estimating the Effects of Foreign Bribery Legislation

Foreign bribery the payment of bribes across borders poses a classic collective action problem in theory. A firm may extract benefits through the payment of bribes to foreign public officials without its own country bearing the associated costs of governmental corruption, and hence while eliminating foreign bribery may be in the best interests of all who are engaged with the global economy, there are few obvious incentives for any one national government to be the first to take action. Over the last two decades, however, an unprecedented degree of multilateral cooperation on the issue of foreign bribery has been achieved. In particular, the Organization for Economic Cooperation and Development (OECD) has been a key institutional locus of activity, serving as the coordinating body for the monitoring and enforcement of a comprehensive anti-bribery convention that was adopted in 1997. This convention appears to have been largely successful at least in terms of spurring legislative change: all OECD member countries as well as several nonmember nations have since adopted laws that explicitly criminalize the act of bribing foreign public officials, and the capacity of the state to monitor, detect, and prosecute the offence of foreign bribery has ostensibly been enhanced. Given the potential for collective action problems to develop, it is thus important to ask whether the legislative action that has been taken thus far is meaningful in any measurable sense. I answer this question by constructing an original measure of the strictness of foreign bribery legislation, which I then employ as the main independent variable in an empirical study of export data, utilizing both difference-in-difference estimators and regression analysis. The results of my analysis provide support for the hypothesis that the enactment of stricter foreign bribery legislation amongst the countries party to the OECD convention has reduced exports to more corrupt countries more so than it has exports to less corrupt countries. These findings are robust to a variety of sensitivity tests, and I thus conclude that the OECD's multilateral anti-bribery initiatives have indeed had a meaningful impact on business decisions in the international economy. Thesis Supervisor: Gabriel Lenz Title: Associate Professor of Political Science ESTIMATING THE EFFECTS OF FOREIGN BRIBERY LEGISLATION IN THE INTERNATIONAL ECONOMY Foreign bribery the payment of bribes across borders poses a classic collective action problem in theory. A firm may extract benefits through the payment of bribes to foreign public officials without its own country bearing the associated costs of governmental corruption, and hence while eliminating foreign bribery may be in the best interests of all who are engaged with the global economy, there are few obvious incentives for any one national government to be the first to take action. It is thus important to ask: can multilateral approaches to legislative reform make a meaningful difference to the prevalence of foreign bribery in the international economy? In this thesis, I answer this question by assessing how international business transactions are affected when governments enact stricter legislation regulating the payment of bribes overseas, focusing in particular on a series of anti-bribery initiatives that have been coordinated through the formal structures of the Organization for Economic Cooperation and Development (OECD) since the mid-1990s. Since one might expect anti-bribery laws to be most pertinent precisely when bribery is most prevalent, I also consider whether the effects of such legislation are conditional on the extent of corruption in the countries where international business transactions take place. To do so, I first construct an original measure of the strictness of foreign bribery legislation, which I then employ as the main independent variable in an empirical study of the relationship between foreign bribery laws and the level of inter-country exports, utilizing both simple difference-in-difference estimators as well as regression analysis of export data. The layout of this thesis is as follows. Section 1 provides an introduction to the issue of bribery in the international economy, discussing both the motivations for and the significance of the research topic explored in this thesis. Section 2 then describes the main features of the OECD's anti-bribery initiatives since the mid-1990s, so as to establish the context for the subsequent analysis. Section 3 describes the research methodology adopted and constructs the main statistical model, while Section 4 discusses the sources of data as well as the treatment of missing data. Section 5 then presents the results of the empirical analysis and provides interpretations for the main findings. A series of robustness tests are also discussed, and alternative explanations are assessed. Finally, Section 6 concludes by considering the implications of the findings of this thesis.