Multinational Business Review

Determinants of Corruption: A Cross-National Analysis

Hoon Park
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 Fall 2003 Volume 11 Number 2

Determinants of Corruption:
A Cross-National Analysis
Hoon Park, University of Central Florida

The Multinational Business Review

ABSTRACT: The background literature survey points to the fact that the
degree of corruption is a function of multiple factors of a society. Thus, it is
imperative to take a more comprehensive and cross-disciplinary approach to
understand the complete picture of corruption. The research findings indicate
economic freedom, socio-political stability, tradition of law abidance and
national cultures are the major variables that dictate the degree of corruption.
This study expands the existing knowledge about the determinants of corrup-
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tion and provides incremental information to help the policy makers fight
against this cancerous social disease.

INTRODUCTION establishment and maintenance of

The worldwide spread of
corruption has been recognized as one
of the darker sides of globalization.
As Glynn, Kobrin, and Naim (1997)
argue, corruption impedes economic
development and distorts international
trade and investment flow. It also
undermines the very base of multi-
lateralism, which is the backbone of
free world trade. Recently, there has
been a dramatic increase in the
number of cross-border mergers and
acquisitions (M&As) and strategic
alliances. The strategic alliances and
cross-border M&As depend more on
mutual trust than on the traditional
firm. Different norms and standards
of business ethics can significantly
reduce the level of this mutual trust
and belief, preventing the
internationally accepted “rules of the
game.” This is the reason why so
many international agencies,
including the World Bank and OECD,
denounce corruption as one of the
major problems faced by a globalized
world economy, and recently started
to take the initiative in combating
corruption.
However, fighting against
corruption is not an easy task because
corruption is a very complex and
intertwined social phenomenon. A
consensus from the survey of the
previous literature points to the fact
that the degree of corruption is a
function of multiple factors, including
almost every aspect of society. Given
this, it is surprising to find a paucity
of cross-disciplinary research that

Dr. Hoon Park is an Associate Professor of International Business in the Depart-

ment of Finance at the University of Central Florida. His research interests include
cross- cultural management and international strategic alliances. E-mail:
hoon.park@bus.ucf.edu

29
 Volume 11 Number 2
simultaneously examines the various
aspects of corruption. Thus, the main
thrust of this research is to take a more
comprehensive and cross-disciplinary
approach to understand the major
The Multinational Business Review
determinants of this multifaceted
social and economic phenomenon.
BACKGROUND RESEARCH
Corruption has been defined in
many different ways. Even though
many articles devote their entirety to
this subject alone (Heidenheimer,
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Johnston and Levine, 1989; Gardiner,
1993; Dolan, McKeown & Carlson,
1988), there is little consensus about
its definition. However, Johnston
(1996) provides an excellent typology
for the definition of corruption. He
identifies two different strands in the
literature. The first strand (Nye, 1967;
Friedrich, 1966; Van Klaveren, 1989;
Heidenheimer, 1989) focuses on the
behavioral aspects of corruption.
These behavior-focused definitions
generally hold the notion that
corruption is the abuse of public
office, powers, or resources for
private gain. The second strand
focuses more on principal-agent-
client relationships (e.g., Rose-
Akerman, 1978; Klitgaard, 1988).
These researchers pay more attention
to the interactions among the parties
involved: a principal (an individual
who is in charge of carrying out a
public function), an agent (an
individual who actually performs the
operation of the agency), and a client
(a private individual with whom the
agent interacts). Even if the second
approach provides us with a clearer
picture of the complex nature of
30
Fall 2003
corruption, it is very difficult to draw
an operational definition of corruption
from this approach. Thus, we decided
to use the first approach, which offers
the most commonly accepted
operational definition of corruption:
“the abuse of public power for private
benefit.”
There is a proliferation of
literature on corruption in general.
However, many researchers recently
pay a greater attention to the causes
and antecedents of corruption in an
attempt to develop effective tools to
fight against it. Kraay and Van
Rijickeghem (1995) and Haque and
Sahay (1996) found out that having
an income that is low forces
individuals to find alternative sources
of income, even if those sources are
illegal. A group of researchers
(Swamy, Knack, Lee and Azfar, 1999;
Venerisris and Gupta, 1986; Gupta,
1990; Alesina and Perotti, 1996)
attribute inequitable distribution to
corruption. Many researchers argue
that various economic regulations,
such as tax policy (Webster and
Charap, 1993; Novitzky, Novitzky
and Stone, 1995), tariff (Pritchett and
Sethi, 1994), price controls (Mauro,
1997), government subsidies
(Clements, Hugounenq, Schwartz ,
1995), as well as multiple exchange
rate systems and foreign exchange
control (Levine and Renelt, 1992) can
lead to rent seeking behavior by public
officials. Rose-Akerman (1997)
found that under public regulatory
programs, government officials can
deliberately delay or harass people by
an arbitrary application or
interpretation of the law and
 Fall 2003
discretionary judgment in an attempt
to seek personal gain. Alesina and
Perotti (1996) point out that socio-
political instability, by creating
uncertainty in the society, increase
corruption. Many researchers attribute
a weak legal system to widespread
corruption, particularly in many
developing countries (Tanzi, 1998;
Gray, 1997; Sanjian, 1994). A group
of researchers also suggest poor
quality of government officials as
another important source of
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corruption in a society (Tanzi, 1998;
Klimo, 1997; Rauch and Evans,
2000). Most recently, Zhao, Kim and
Du (2003) found a negative
relationship between the level of
corruption and inward foreign direct
investment.
However, as McDonald (1994)
argues, a recognizable absence in the
empirical studies on the causes of
corruption is the lack of attention paid
to the saliency of cultural values as
antecedents of corruption. Only a
limited number of researchers
recognize national culture as a
potential source of corruption.
Shleifer and Vishny (1993) argue that
the degree of heterogeneity in a
society in terms of ethnicity and
language is positively correlated to the
degree of corruption. Vitell,
Nwachukwu and Barnes (1993) also
discussed cultural aspects of
corruption using Hofstede’s (1983b)
cultural dimensions. However, most
of the research that discusses the
cultural aspects of corruption has been
anecdotal and descriptive at best,
excepting the recent Husted (1999)
study.
Volume 11 Number 2
RESEARCH HYPOTHESES
Since the background literature
focusing on the causes of corruption
reveals that the degree of corruption
is a function of multiple factors (such
The Multinational Business Review
as the economic conditions, the degree
of government intervention in the
private economy, the legitimacy of the
legal system, socio-political stability,
and national culture), a set of
hypotheses is developed below.
National Income
As Lesnik and Blanc (1990)
describe, scarcity is the father of
corruption. The level of income could
be one of the major economic
variables that affect the level of
corruption through its impact on
scarcity. In many poor developing
countries, people don’t have enough
financial resources to support their
families in a normal way. Economic
difficulties in poor countries often
result in a blurring effect between law-
abiding and criminal behavior. They
do not have the luxury to think about
what is legal or not. As Staw &
Szwajkowsky (1975) argue, people
will understandably take any action,
including engaging in illegal activities,
when they experience difficulty
acquiring the resources necessary for
survival.
The situation puts pressure on
public servants as well to find
alternative sources of income. Along
the line of efficiency-wage
mechanisms, Kraay and Van
Rijckeghem (1995) found that when
civil servants are not paid enough,
they are forced to use their position
and power to seek rent. As Leiken
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 Volume 11 Number 2
(1996) points out, when government
does not pay civil servants decent
salaries, they can’t buy a layer of
insulation against patronage and
bribery. In some cases, once a
The Multinational Business Review
government subscribes to the view
that civil servants earn sufficient
income from corruption, they may
reduce civil servants pay as a
consequence (Lambsdorff, 1998).
This can cause a vicious cycle in some
countries and encourages illegal
activity by civil servants. Following
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this line of reasoning, hypothesis #1
is proposed below.
H1: The lower its national
income, the higher the degree
of corruption in a country.
Income disparity
Swamy, Knack, Lee, and Azfar
(1999) point out that it is possible that
social cohesion may be lower and
hence corruption may be higher in
countries where income inequality is
high. Gupta (1990) also found a
significant relationship between
income disparity and political
instability, which may eventually lead
to corruption by creating social
discontent and uncertainty in the
politico-economic environment.
The concept of distributive
justice and fairness may vary from
culture to culture; however, as
Greenberg (1987) argues, the most
espoused concept of “fair”
distribution is one in which outcomes
are commensurate with inputs. When
outcomes are perceived as unfair,
individuals may attempt to restore
balance by engaging in undesirable
32
Fall 2003
behaviors (e.g., Cowherd and Levine,
1992). In many countries, even if
national income increases rapidly,
lower class income may not increase
proportionately. Thus, as Olson
(1963) argues, the inequitable income
distribution could become a
destabilizing force, leading to political
instability and corruption.
Merton’s (1957) “structural
strain” theory of deviance also
suggests that individuals or groups
that are placed low in stratification
systems feel that they are denied
access to their goals through
legitimate means. The resulting
“strain” forces them to resort to
deviant means. The majority of people
in high income disparity countries,
who feel trapped in “structural strain,”
seek deviant means such as bribery to
achieve their financial goals.
Following this line of thought,
hypothesis #2 is proposed below.
H2: The higher the inequality
of its income distribution, the
higher the degree of
corruption in a country.
Economic Freedom
Staw and Szwajkowski (1975)
found that private firms dealing with
less munificent environments engaged
in a higher number of illegal activities.
Tax policies (Novitzky, Novitzky and
Stone, 1995), price controls (Mauro,
1997), multiple exchange rate
systems, and foreign exchange
controls (Levine and Renelt, 1992),
and rules on government subsidies
(Clements, Hugounenq, Schwartz ,
1995) are typical examples of
 Fall 2003
government regulations that can lead
to rent seeking behaviors.
Alam (1995) argues that
corruption occurs because the
government has a monopoly power
over certain resources. Government
officials who hold this monopoly
power may refuse or delay the
authorization of certain economic
activities in order to extract bribes
from those who need authorizations
or permits (Tanzi, 1998). Bribery is
also often used as “speed money” to
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skip cumbersome regulatory
procedures and as grease for the
wheels in over-regulated societies,
such as found in many developing
countries (Brademas & Heimann,
1998). When too many regulations
and rules frequently impede free
economic activities, this creates a
breeding ground for rent-seeking
behavior by public officials and
increases the level of corruption.
Following this line of thought,
hypothesis #3 is proposed below.
H3: The less economic
freedom (the more
regulation), the higher the
degree of corruption in a
country.
Socio-Political Instability
Another major source of
corruption is overall socio-political
instability, which can be viewed as a
“threat to the property rights of
individuals” in a society. When social
unrest is widespread, the probability
of the government being overthrown
is higher, making the course of future
economic policy and protection of
Volume 11 Number 2
property rights more uncertain. The
occurrence of attempted coups or
successful coups indicates a
propensity to abandon the existing
policy and regulation and, therefore,
The Multinational Business Review
in principle, creates a threat to
established social status and property
rights.
Socio-political instability, per se,
may not directly cause corruption.
However, as Alesina and Perotti
(1996) point out, socio-political
instability, by creating unrest and
uncertainty in the socio-economic
environment, increases the overall
level of corruption. In politically
unstable countries where there is
much civil unrest, people will feel the
need to preserve their status and
properties. The concept of “status
strain” introduced by Lipset and Raab
(1970) can explain how people
behave when they fear losing their
status. This fear of status decline is
caused when those who are socially
well-established feel threatened.
Escalated anxiety and fear from this
“status strain” in politically unstable
countries will put pressure on the
people to do anything possible in
order to protect their social status and
property—including corrupt
behaviors.
Shliefer and Vishny (1993)
suggest that the ephemerality of public
official tenure caused by socio-
political instability makes civil
servants irresponsible and tempts
them to get involved in some form of
illicit rent seeking behaviors. They
know that these rent seeking
behaviors, even if illegal, will enable
them to build a substantial amount of
33
 Volume 11 Number 2
wealth that can protect them and
maintain their social status even after
they lose their jobs. Thus, a higher
socio-political instability, through its
impact on uncertainty and anxiety in
The Multinational Business Review
the society, creates a more corrupt
environment. Based on the above
reasoning, hypothesis #4 is proposed
below.
H4: The higher its socio-
political instability, the higher
the degree of corruption in a
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country.
Legitimacy of Legal System
Many researchers find a
significant association between the
rule of law and the level of corruption
within a society. Becker (1968)
argues that one of the major factors
that can influence the level of illegal
activity in a society is the probability
that those who commit crimes will be
apprehended. A low chance of a
perpetrator being apprehended and/or
convicted due to a weak legal system
indirectly encourages corruption by
creating a favorable environment for
corruption.
Sanjian (1994) suggests that
there is a serious correlation between
the level of corruption and people’s
disrespect for authority and the legal
system. Stolz (1998) indicates that
chronic ambivalence on the part of the
law-abiding toward the law and legal
system blurs the line between legal
and illegal behavior and influences the
overall level of corruption. Berman
(1977) points out that the widespread
daily illegal activities and corruption
in a country like Russia is attributed
34
Fall 2003
to traditional Russian Orthodox ideals
and their peasant’s view of the
criminal as the “unfortunate one”—a
victim of society and system for
whom the society should share the
guilt.
Thus, the “legitimacy of legal
system” that reflects the overall
strength of the legal system and the
degree of society’s respect and
tradition to accept the established
legal system as a means to adjudicate
disputes can be directly related to the
overall level of corruption in the
society. Based on this line of thought,
hypothesis #5 is proposed below.
H5: The weaker the
legitimacy of its legal system,
the higher the degree of
corruption in a country.
Bureaucratic Quality
As Rose-Akerman (1997) points
out, the level of corruption is partly a
function of honesty and integrity of
public officials. If government
officials (the principal and the agent)
who hold a great amount of power
lose their integrity and cave into the
temptation of bribery, the whole
society can become rapidly corrupted.
As Tanzi (1998) argues, the quality of
bureaucracy varies greatly among
countries. In some, public sector jobs
hold a great deal of prestige and status.
In others, they do not. Klimo (1997)
indicates that tradition and its effect
on the pride that individuals have in
working for the government explain
why some bureaucracies are much
more efficient and much less
vulnerable to corruption than others.
 Fall 2003
Recent research by Rauch and Evans
(2000) indicates that the less
recruitment and promotion are based
on merit, the higher the extent of
corruption. In order to stop wide
spread corruption among the
bureaucracy, the quality of
bureaucracy should be at least
“legal—rational,” using Weber’s
(1978) term. In this context, the
quality of bureaucracy can be another
shock absorber, which tends to
minimize widespread corruption in a
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society. Following this line of
thought, hypothesis # 6 is proposed
below.
H6: The lower its
bureaucratic quality, the
higher the degree of
corruption in a country.
Cultural Variables
There are four major pioneering
research projects aimed directly at
identifying cultural dimensions of
value and developing cultural indices.
Those are the projects of Hofstede
(1983b), Schwartz (1992),
Trompenaars and Hampden-Turner
(1998) and House, et.al.
(forthcoming). Schwartz (1992) and
Trompenaars and Hampden-Tuner
(1998) offer a richer reflection of
national core culture at a theoretical
level. The only problem is their
limited sample size. House’s project
is more extensive. However, its focus
on leadership/organizational
effectiveness makes it somewhat
difficult to use for the present study.
In that context, Hofstede’s work
(1983b) is still the most useful,
Volume 11 Number 2
primarily because of its sample size,
even though it has been criticized for
its methodology and the interpretation
of the data.
The Multinational Business Review
Power distance
Power distance can be defined as
the extent to which the less powerful
members of the organizations in a
society expect and accept the unequal
distribution of power (Hofstede,
1983b). In high power distance
cultures, the illegal application of
power is rarely challenged by the non-
power holder. As Cohen and Nelson
(1994) argue, unequal power
distribution between power holders
and non-power holders in this type of
culture discourages subordinates from
questioning authority. Any whistle-
blowing initiated by subordinates
against their superior will be viewed
as disloyalty or a challenge to
authority, and the society would not
be very sympathetic to the whistle
blower who betrayed his superior.
Victor and Cullen (1988)
indicate that in high power distance
cultures, not only would the superior
be less tolerant to whistle blowing
behavior but also try to retaliate using
all of his power. High power distance
cultures, in which subordinates cannot
blow a whistle for fear of retaliation,
facilitate the environment for a “crime
of obedience” as noted by Kelman
and Hamilton (1989). People in high
power distance cultures assume that
superior orders override any moral
considerations that might apply in
other situations, freeing them of
responsibility for their actions. This
can create a more deleterious
35
 Volume 11 Number 2
environment for corruption.
Following this line of thought,
hypothesis #7 is proposed below.
H7: The higher the power
The Multinational Business Review
distance, the higher the
degree of corruption in a
country.
Individualism-Collectivism
Individualism and collectivism
constructs have been widely used and
discussed in many contexts in many
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fields of social studies. However,
there are several major characteristics
in collectivist cultures that can
potentially influence the overall level
of corruption in a society—such as
conformity (an individual’s emotional
dependence on his group), obedience,
loyalty, and the significance of in-
groups.
Pressure for conformity among
the in-group members can
significantly influence overall levels
of corruption in a society through its
impact on obedience and loyalty to
the group. Triandis (1994) points out
that one of the attributes of an
“allocentric” culture, which is more
prevalent in a collectivist culture, is
obedience, which makes it easier to
attain conformity. Acquiescence and
loyalty is often needed to attain
conformity. It also makes criticism,
opposition, and whistle-blowing more
difficult in collective culture.
Cultural values can also lead to
certain normative beliefs, such as
notions about social justice versus
personal obligation. Cohen and
Nelson (1994) argue that in collective
cultures, where priority is given to the
36
Fall 2003
family members or friends, obligation
and loyalty to intimate in-group
members may become a more
important ethical standard to observe
than social justice. This type of culture
holds different norms and standards
for justice for two different groups
(the in-group and the out-group) and
easily facilitates the negotiate of
justice for familial duty or loyalty
based on in-group membership. In
individualistic cultures, where
individual rights are paramount,
equitable administration of justice
becomes a central ethical theme.
Because the individual is motivated
by his personal goals and interests in
individualistic cultures, cooperation
and conspiracy, which are often
necessary for widespread corruption,
can be more difficult in individualistic
cultures than in collective cultures.
Along this line of thought, hypothesis
#8 is proposed below.
H8: The more collective in its
culture, the higher the degree
of corruption in a country.
Masculine-Feminine
As Hofstede (1983a, 1983b)
indicates, masculine cultures focus
more on quantity of life and
emphasize independence and
achievement (power, wealth, and
status), whereas, feminine cultures
stress quality of life and value
interdependence, relationships and the
welfare of other people. As Vitell,
Nwachukwu and Barnes (1993)
argue, societies that are characterized
as masculine encourage individuals,
especially males, to be ambitious, be
 Fall 2003
competitive, and strive to achieve
material success.
Scale (big) and speed (fast) are
also venerated values in masculine
cultures. Being fast is seen as being
efficient and being big is considered
to be great (Hofstede, 1983a)
However, in many cases, “big” and
“fast” achievements are only possible
through illegal or abnormal processes.
An impatient drive for big and fast
achievement is sometimes blamed for
wide spread corruption in a country
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(Rhee, 1999.) In order to achieve a
goal faster than others, people feel
pressed to provide “grease money”
(Bardemas and Heimann, 1998). In
this type of culture, people value
speedy and substantial achievement
more than legitimacy and social
justice. Less social stigma is attached
to those who get caught in pursuit of
fast and big success. They may
simply be considered unlucky.
Ostentatious manliness, which is
emphasized among the male members
of a masculine culture, can also play
a significant role in mental
programming at an ethical crossroad
(Hofstede, 1983a) for decision
making. It can push one to favor a
“now or never” kind of attitude to
achieve financial goals in a “big and
fast” way. If one is too hesitant or too
reluctant to take a chance to attain
what is desired, one may be criticized
as being cowardly or lacking
confidence. Thus, even though we
should exercise every effort not to
conflate the characteristics of each
gender with this particular cultural
dimension, the values prevalent in a
masculine culture can create a more
Volume 11 Number 2
unwholesome environment for
corruption. Based on this reasoning,
hypothesis #9 is proposed below.
H9: The higher the degree of
The Multinational Business Review
masculinity in its culture, the
higher the degree of
corruption in a country.
Uncertainty Avoidance
Uncertainty avoidance centers on
how societies deal with the unknown
aspects of its future. In high
uncertainty avoidance cultures, the
uncertainty inherent in life is felt as a
continuous threat that must be fought
and a primary focus of the society is
how to prevent anxiety and
uncertainty in individuals’ lives.
People in high uncertainty
avoidance cultures have a greater
concern for security in their lives and,
therefore, have a strong inner urge to
search for instruments to control their
future life (Hofstede, 1983b). They
will take actions to reduce uncertainty
in life, including engaging in illegal
activities, which aid in their survival.
Reducing uncertainty to ensure
survival is of greater importance than
legitimacy in high-risk avoidance
cultures. Furthermore, in a high
avoidance country, the greater fear of
uncertainty and anxiety can cause
more “status strain” (Lipset and Raab,
1970) and “structural strain” (Merton,
1957) than in a low avoidance
country. Even if they perceive the
same amount of anxiety and
uncertainty in their lives, the people
in high uncertainty avoidance cultures
suffer more from it. This additional
suffering will put pressure on them to
37
 Volume 11 Number 2
work harder to search for ways to
relieve this anxiety and uncertainty.
Often, their lifetime experiences
persuade them that one of the most
effective instruments to deal with
The Multinational Business Review
uncertainty in their future lives is a
substantial amount of wealth. This
puts a considerable amount of
pressure on them to do anything to
build wealth—including illicit
behaviors like corruption that offers
an opportunity to build a substantial
amount of material wealth. Along this
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line of thought, hypothesis #10 is
proposed below.
H10: The higher the degree
of uncertainty avoidance in
its culture, the higher the
degree of corruption in a
country.
DATA SOURCES
Several different data sources are
available for the degree of corruption
in a country. One of them is the CPI
(Corruption Perception Index)
developed by Transparency
International, which ranks 85
countries and has been published
annually since 1995. The validity and
reliability of the CPI index has been
endorsed by Lancaster and Montinola
(1997), and the index has been widely
used in recent studies (e.g., Husted,
1999; Swamy, Knack, Lee, Azfar,
1999). However, the “reversed” scale
of TI’s CPI index (Corruption free =
10 and total corruption = 0) can cause
a problem when interpreting statistical
results. Extra caution will be needed
to interpret the coefficient signs in
statistical results because a negative
38
Fall 2003
coefficient sign means that the factor
is positively related to degree of
corruption in a country.
For national income, GNP per
capita data is used to eliminate the size
effect. The data for these variables are
drawn from the World Development
Indicators published by the World
Bank (1999). For income disparity,
we decided to use the income share
of the top 20 percent of the population
rather than using the GINI index,
which has been a weak predictor in
recent studies (e.g., Gupta, 1990;
Husted, 1999). Alesina and Perotti’s
(1996) Socio-Political Index (SPI
index) is used for socio-political
stability because of its focus on
political instability as a threat to
property rights. However, the original
index values were re-scaled by
assigning a value of zero to the most
stable country, which had an original
index of -11.76 and then assigning
other countries increasingly positive
values to represent greater instability.
For economic freedom, the 1999
Index of Economic Freedom (IEF)
published by Heritage Foundation and
the Wall Street Journal was used. The
IEF index is a good proxy for the
overall degree of government
intervention in an economy, because
it contains detailed information about
the degree of government regulations
on prices, international trade, capital
flows, taxation, foreign investments,
foreign exchange control and
banking/insurance. For bureaucratic
quality, the IRIS data set compiled by
the PRS group is used since their
bureaucratic quality index represents
not only the overall quality of
 Fall 2003
bureaucracy but also reflects the
degree to which a country has an
established mechanism to ensure the
quality of the bureaucracy. For the
legitimacy of legal system
component, we use the IRIS data for
the “rule of law” as a proxy. The data
set represents the strength of the legal
system and the degree of a society’s
dependence on law and order tradition
to settle claims against physical
forces/illegal means, which coincides
with our operational definition of the
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variable.
DATA ANALYSIS AND
DISCUSSION
The binding constraint on the
number of countries investigated is
sheer data availability. The CPI index
is available for 85 countries and
Hofstede’s cultural indices are
available only for 50 countries. The
total number of countries for which
all the data are available for the 10
variables in the first model A is limited
only to 30. However, when we drop
three variables which turn out to be
insignificant in the first model, the
total number of samples in the second
model B (with seven variables)
increases to 37. This is because model
B has less variables and more
countries in the data pool are qualified
to be included in model B.
Pearson product moment
coefficients of correlation were
calculated between all the variables.
Since Bureaucratic Quality (BURO)
has a high correlation with three other
variables (GNP; r=0.79, IND; r=0.80,
LAW; r=0.80), this variable is
dropped from the model. GNP also
Volume 11 Number 2
displays a relatively high level of
correlation with other variables
(REVSPI, EFREE, LAW and IND).
The high correlation between GNP
and Individualism (IND) was already
The Multinational Business Review
discussed in Hofstede’s (1983b)
study. The correlation between GNP
and the remaining three variables
suggests a possible mediating effect
of GNP on corruption through these
variables.
To test our hypotheses, a series
of multiple regressions was conducted
based on two models (model A and
B). Model A includes all variables
except bureaucratic quality {GNP/
capita (GNP), Revised Socio-Political
Instability (REVSPI), Economic
Freedom (ECONFREE), Uncertainty
Avoidance Index (UAI),
Individualism Index (IND), Power
Distance Index (PDI), Masculine
Index (MAS), Legitimacy of Legal
System (LAW), Upper 20 percentile
of Income (HIGH20).} In order to
check for heteroskedasticity of an
unknown form, which can be a
potential source of noise when using
cross sectional data, White’s (1980)
heteroskedasticity-consistent
covariance matrix estimator was used.
The results from this test are reported
in Table 1, shown on the next page.
The adjusted R2 of this model A
is 0.8977 and the F statistics for
overall fitness of the model is 29.2880
(p<0.0000). Three variables
(ECONFREE, PDI and MAS) are
significant at p<0.001 level and one
variable (REVSPI) is significant at p
<0.05. We did not find any significant
relationship between the level of
corruption and five remaining
39
 Volume 11 Number 2 Fall 2003

Table 1 ( Model A): Multiple Regression Analysis

White Heteroskedasticity-Consistent Estimator of the Coefficient Covariances

Dependent Variable: REVCPI (Revised Corruption Perception Indices)

The Multinational Business Review

Method: Least Squares

R2: 0.929476 Adjusted R2: 0.897740 Included observation: 30

Variable Coefficient Std. Error t-Statistic Prob.

GNP -0.020199 0.023823 -0.847912 0.4065
REVSPI 0.065771 0.026801 2.454055 0.0234*
ECONFREE 1.595622 0.414750 3.847193 0.0010***
UAI 0.011752 0.008547 1.374951 0.1844
IND -0.008788 0.012779 -0.687654 0.4996
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PDI 0.023967 0.006745 3.553230 0.0020**

MAS 0.025444 0.006141 4.143523 0.0005***
LAW -0.249816 0.213905 -1.167880 0.2566
HIGH20 -0.001058 0.026570 -0.039805 0.9686
C -1.874575 2.356424 -0.795517 0.4357

* significant at 0.05 level REVCPI =Revised Corruption Perception Index

** significant at 0.01 level GNP =GNP per capita
***significant at.001 level REVSPI =Revised socio-political instability
ECONFREE =Economic Freedom
UAI =Uncertainty Avoidance Index
IND =Individualism-Collectivism Index
PDI =Power Distance Index
MAS =Masculine-Feminine Index
LAW =Legitimacy of legal system
HIGH20 =Upper 20 % of Income distribution

variables (GNP, UAI, IND, LAW and
HIGH20) at the level of p= 0.05.
These results could not support
hypotheses #1, #2, #5, #8, and #10.
Particularly, insignificance of GNP as
an explanatory variable was
somewhat perplexing because it is
quite contrary to what Husted’s (1999)
found. However, the high level of
correlations between GNP and two
other variables (REVSPI and
ECONFREE) that are found to be
significant suggests the possibility of
a mediating effect of GNP on
corruption through these variables. It
is conceivable that low national
income can breed socio-political
instability and, thereby, lead to a
higher level of corruption through
social unrest and uncertainty in the
society. Advanced economy with high
national income can be more
munificent in implementing policy
and impose fewer regulations, which
will produce fewer chances for rent
seeking behaviors.
Model B contains six variables,
excluding those three variables that
turn out to be least significant in
model A, in order to ensure an optimal
balance between the degree of
freedom problem (small samples) and
the explanatory power of the model.
The results of regression analysis on

40
 Fall 2003 Volume 11 Number 2

Table 2 (Model B): Mulptiple Regression Analysis

White Heteroskedasticity-Consistent Standard Errors & Covariance

Dependent Variable: REVCPI (Revised Corruption Perception Indices)

The Multinational Business Review

Method: Least Squares
R2: 0.928203 Adjusted R2: 0.913843 Included Observations: 37

Variable Coefficient Std. Error t-Statistic Prob.

REVSPI 0.072308 0.014495 4.988561 0.0000****
ECONFREE 1.648891 0.301510 5.468781 0.0000****
UAI 0.011495 0.006224 1.846828 0.0747*
PDI 0.029299 0.005750 5.095747 0.0000****
MAS 0.024227 0.005935 4.081880 0.0003***
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LAW -0.428521 0.122351 -3.502404 0.0015***

C -2.266487 1.328701 -1.705792 0.0984

* significant at 0.10 level REVCPI =Revised Corruption Perception Inde

** significant at 0.01 level REVSPI =Revised socio-political instability
*** significant at 0.001 level ECONFREE =Economic Freedom
****significant at 0.0001 level UAI =Uncertainty Avoidance Index
PDI =Power Distance Index
MAS =Masculine-Feminine Index
LAW =Legitimacy of legal system

White Heterskedasticity Test:

F-statistic 0.739755 Probability 0.701065
Obs* R-squared 9.990284 Probability 0.616813

model B using White’s (1980) out of six are significant at p<0.001

heteroskedasticity-consistent
covariance matrix estimator are
reported in Table 2.
Since the reported P values for
both the F statistic (0.701065) and
Obs* R-squared (0.616813) are
significantly larger than the cut off
point 0.05, it indicates that the model
does not suffer from any serious
heteroskedasticity problems. The
adjusted R2 for model B (0.913843)
is even higher than that of model A.
Overall, the results are very strong
given the small number of
observations and different sources of
noises in the data set. In this model,
five variables (REVSPI,
ECONFREE, PDI, MAS, and LAW)
level.
Finally, in order to understand
the relative significance of the
variables in the model, a stepwise
regression and a set of standardized
coefficients of the variables were
calculated and are reported in Table 3
shown on the next page.
The results of the stepwise
regression (incremental R 2 and
associated F value) indicates that five
(LAW, PDI, REVSPI, ECONFREE,
and MAS) of the six explanatory
variables pass the F-ratio threshold
(Probability of F to enter<=0.05, to
remove >= 0.100) associated with a
last-to-be entered assumption. A set
of standardized coefficients and their

41
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The Multinational Business Review

42
Table 3: Stepwise Regression Analysis and Standardized Coefficients
Criteria: Probability of F statistic to enter; <=0.05, to remove; >=0.10

Model Summary
Volume 11 Number 2

Collin-
R R F Standzd T earity
Model R R2 (change) (adjstd) (change) Coeff. value Tolerance VIF
1 0.818 0.669 0.669 0.660 70.839 -0.255 -3.190 0.399 2.507
2 0.878 0.771 0.101 0.757 15.043 0.246 3.589 0.539 1.855
3 0.914 0.836 0.065 0.821 13.198 0.322 5.264 0.681 1.468
4 0.938 0.880 0.044 0.865 11.767 0.316 4.504 0.516 1.939
5 0.960 0.921 0.041 0.908 16.098 0.207 4.012 0.958 1.044

Model Predictor
Model 1: LAW
Model 2: LAW, PDI
Model 3: LAW, PDI, REVSPI
Model 4: LAW, PDI, REVSPI, ECONFREE
Model 5: LAW, PDI, REVSPI, ECONFREE, MAS
Fall 2003
 Fall 2003
associated t statistics for those five
variables provide some clue regarding
the relative importance of each
variable in the model. The variable
that displays the highest t statistic is
REVSPI followed by ECONFREE,
MAS, PDI and LAW in descending
order. The collinearity statistics of the
variables in Table 3 also reveal
relatively low VIF, less than the
suggested cut-off point five, which
indicates the model does not suffer
any serious multicollinearity problem.
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A series of hypotheses were
tested for each explanatory variable
in model B. First of all, the p value
and the sign of the coefficient of
REVSPI (socio-political stability)
reported in Table 2 strongly support
hypothesis # 4. The socio-political
instability brews uncertainty and
anxiety in the society and this
escalated anxiety and fear will put
pressure on the people to do anything
possible to protect their status in the
future regardless of its legality. The
research results also indicate that the
degree of economic freedom
(EFREE) is another major element
that can influence the degree of
corruption. The sign of the coefficient
supports our hypothesis # 3, that the
less freedom (more regulation)
individuals have in their economic
activities, the more likely they are to
be corrupt.
Another major variable that can
explain a significant portion of
variance in the degree of corruption
is the Power Distance Index (PDI).
The statistical results and the sign of
the coefficient of this variable support
our hypothesis # 7, that high power
Volume 11 Number 2
distance cultures are likely to be more
corrupt than low power distance
cultures.
The legitimacy of legal system
(LAW) was significant and its
The Multinational Business Review
negative coefficient supports out
hypothesis # 5, that the countries with
established law and order tradition are
likely to be less corrupt.
Masculine-Feminine Index
(MAS) is significant and its positive
coefficient supports our hypothesis #
9, that masculine cultures are likely
to be more corrupt than feminine
cultures.
CONCLUSION
This study corroborates the
belief that the overall level of
corruption is a reflection of multiple
aspects of a society. Since the degree
of economic freedom is identified in
this research as one of the major
variables influencing the level of
corruption, deregulation and
decentralization of government
activities can be an effective remedy
in the fight against corruption. As the
degree of corruption is also
significantly related to the legitimacy
of the legal system, establishment of
a reliable and legitimate legal system
and a law-abiding tradition are
indispensable to checking corruption.
Socio-political stability is another
major deterrent that can check
widespread corruption because
instability in the system escalates
social unrest and anxiety in a society,
which will lead to more “status
strain”. The results of this study also
confirm Husted’s (1999) finding that
culture is still the major factor
43
 Volume 11 Number 2
influencing the level of corruption.
Although Sternberg (1994) concluded
that the development of universally
acceptable norms and principles of
business ethics is possible and rejected
The Multinational Business Review
the idea of cultural relativism in the
area of business ethics, the research
findings indicate that corruption in a
country is still very much a culture-
bound phenomenon.
Consequently, the research
findings suggest that institutional/
regulatory measures without socio-
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cultural reformation may not be
successful in reducing the overall level
of corruption. As Leiken (1996)
correctly argues, when corruption is
systemic, administrative reforms do
not suffice if there is no overall and
persistent social reform that changes
the relevant aspects of national culture
and the epistemology of the people
in the society. The research findings
suggest that fighting corruption
require a tenacious, holistic, and
multidimensional approach to induce
an overall social reform, which will
gradually transform the nature of the
whole society.
This corroborates the time-
honored Santhanam Committee’s
(1964) conclusion and the Review
Committee’s report of the most
revered Independent Commission
Against Corruption of Hong Kong
(1994) that it is possible to deal
quickly with some forms of
corruption but it is, in general, a long-
term problem which requires a firm
resolution and persistent effort to
change the nature of the society over
many years to come.
44
Fall 2003
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