The Prague Post Online: Opinion: Taking the plunge

October 11th, 2008

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Taking the plunge

Companies may complain about corruption but they don't leave
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February 6th, 2008 issue

By Pietro Andrea Podda

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How many times have you heard that dealing with corrupt government officials causes major hassles for multinational companies operating here?

Based on a study I did of about 30 top foreign companies working in the Czech Republic, corruption does not seem to be a big problem.

Let me tell you why.

We all know corruption in the Czech Republic is not as rife as it is in most other former socialist economies, especially if one thinks of the former Soviet republics.

Major international indicators of corruption released by non-profit groups like Transparency International and the Heritage Foundation support this. For example, Transparency International’s 2007 Corruption Perceptions Index ranks the Czech Republic 41st on a list that goes from least corrupt country to most corrupt country based on a number of indicators related to laws on corruption, how banking is done, how taxes are collected, etc. The United States is No. 20 on the list and Russia is No. 143.

This makes sense, since, compared with some other former “socialist brothers,” the Czech state’s authority over its citizens was soundly established at the beginning of the post-socialist era. That means the Czech Republic was not jeopardized by an institutional vacuum during the transition process. Compare that with the disintegration of the former Soviet Union, for example, where arbitrary practices became normal activities.

Still, the Czech Republic scores consistently lower than other Western countries when it comes to common indicators of bureaucratic transparency. This is likely due to the cultural legacy of the communist experience, in which “gifts” and bribes became a common system of business-making as they were used to overcome the rigidities of a state-planned economy.

But does corruption here scare foreign investors away?

I think the answer is the unexpected: not really.

I interviewed foreign business leaders in the Czech Republic to reach my conclusion. They included top decision-makers of companies operating in various sectors, as well as representatives of foreign chambers of commerce. I offered them confidentiality so they could feel free to speak frankly. In addition, I analysed data from the World Bank, using statistical techniques to study the effect of corruption on foreign direct investment.

Multinational companies that come here mainly want new clients. They also want to be close to other Western markets. Low labor costs also play a role. The political environment is considered stable. These are all big advantages for those companies interested in setting up shop.

Corruption appears to be lower on the scale when companies make their decisions.

In my research, I also found that foreign business leaders use bribes as an informal and illegal way of securing contracts and market shares. In other words, foreign investors should not be depicted as “white virgins” who are blackmailed by powerful Czech public officials.

It is not rare for multinational corporations to play an active role in corrupt practices — many consider bribes normal.

What I heard time and again from people who admitted bribes exist is that, if they pay bribes, they want to make sure they get what they’re paying for. If they have to give more money at a second stage, they consider it unfair.

In general, business owners complained to me about intricate bureaucratic procedures but not about the practice of paying bribes to solve these intricacies. Some interviewees said they have never been asked to “grease the wheels.”

A director of a chemical sector company in Bohemia said he had never been asked to pay off a public official in a year of working with the government.

“I can complain that there is a lot of bureaucracy to comply with here, but nobody has ever implied that there was an informal way of obtaining permits and authorizations,” the director said.

At a manufacturing company in south Moravia, the refrain was similar. The manager said he had never been asked for a bribe, but he had heard stories of such requests from his friends and colleagues.

But others said bribing is a common and accepted practice.

In particular, a senior manager of a foreign company active in the real estate market said, “It happens in my sector that some companies pay informal payments to get contracts and work.”

However, he said, “It is the same everywhere.”

How could some officials be so nonchalant about what happens, when Western companies put numerous legal provisions in place forbidding residents to bribe foreign officials? The Foreign Corrupt Practices Act in the United States forbids residents from bribing officials abroad. The European Organization for Economic Cooperation and Development has a similar rule.

Apparently, these legal provisions are not always respected.

Moreover, corruption doesn’t seem restricted to bribing of minor public officials. Many multinational companies aim to “capture the state,” by influencing top decision-makers to their advantage.

In addition, top public officials may be rewarded at the end of their mandates for services rendered to large international conglomerates.

There could be professional reasons for a private company hiring a former minister. For example, a person like former Deputy Prime Minister Martin Jahn acquired experience and developed contacts that could also suit the needs of his current employer, Škoda Auto.

In general, however, naming former politicians as consultants or managing directors to international banking and consulting groups may not depend on their competencies.

Those choices may depend on the “sensitivity” of a former politician during his electoral mandate to the requests advanced by the “state captor.” This practice raises legitimate questions regarding the effective accountability of top politicians: Do they really respond to the electorate?

Other foreign business operators may refuse to invest in the Czech Republic because they do not want to come to grips with the practices I’ve mentioned.

— The author is a lecturer at the New Anglo-American College in Prague and a doctoral researcher at Manchester Metropolitan University in the United Kingdom. He can be reached at p.a.podda@mmu.ac.uk.

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