Corruption and Foreign Direct Investment

The Effect of Transparency In Corporate Reporting on Corruption

Akosua Akrasi-Acheampong 10/9/2012

Abstract This paper investigates the effects of transparency in reducing corruption; with a particularly focus on transparency in corporate reporting. By assessing the disclosure of annual reports released by multinational companies, this study will analyse how transparent they are with their anti-corruption programmes, disclosure of financial accounts and related entities. The findings show that although the chosen companies report on anti-corruption measures, they lack sufficient disclosure in the other areas, and perhaps do not place a high importance on its contribution to deterring corruption. The results also challenge how effective transparency actually is as a method of reducing corruption, and makes recommendations of additional measures that can be adopted.

Contents
INTRODUCTION ................................................................................................................................................ 3 RESEARCH OBJECTIVES ....................................................................................................................................... 4 METHODOLOGY .................................................................................................................................................. 4 STRUCTURE OF THIS PAPER .................................................................................................................................. 5 LITERATURE REVIEW .................................................................................................................................... 6 INTRODUCTION ................................................................................................................................................... 6 TYPES OF CORRUPTION ....................................................................................................................................... 7 BENEFITS AND COSTS OF CORRUPTION ................................................................................................................ 8 CORRUPTION AND COMPETITION ....................................................................................................................... 12 THEORY OF RESIDUAL RIGHTS .......................................................................................................................... 13 CORRUPTION AND INDUSTRY ............................................................................................................................. 15 CORRUPTION AND TRANSPARENCY .................................................................................................................... 16 CORPORATE SOCIAL RESPONSIBILITY ................................................................................................................ 18 SUMMARY OF CHAPTER .................................................................................................................................... 20 METHODOLOGY ............................................................................................................................................. 22 INTRODUCTION ................................................................................................................................................. 22 RESEARCH METHODS ........................................................................................................................................ 22 Qualitative Research .................................................................................................................................... 22 Quantitative Research .................................................................................................................................. 23 Secondary Data ........................................................................................................................................... 24 RESEARCH DESIGN ........................................................................................................................................... 24 LIMITATIONS .................................................................................................................................................... 25 DATA.................................................................................................................................................................. 27 INTRODUCTION ................................................................................................................................................. 27 TRANSPARENCY INTERNATIONAL DATA FOR CORRELATION ANALYSIS ............................................................... 28 RESULTS OF CORRELATION ANALYSIS ............................................................................................................... 31 TRANSPARENCY INTERNATIONAL DATA ............................................................................................................ 33 COMPANY DATA ............................................................................................................................................... 35 THEMATIC ANALYSIS OF SHELL AND TULLOW OIL ............................................................................................. 40 Theme 1:...................................................................................................................................................... 40 Theme 2:...................................................................................................................................................... 42 Theme 3:...................................................................................................................................................... 44 Theme 4:...................................................................................................................................................... 46 SUPPORTING DATA- NEWS ARTICLES ................................................................................................................ 47 Article 1: Tullow Oil .................................................................................................................................... 47 Article 2: Royal Dutch Shell ......................................................................................................................... 48 SUMMARY OF CHAPTER .................................................................................................................................... 48 DISCUSSION ..................................................................................................................................................... 49 INTRODUCTION ................................................................................................................................................. 49 TRANSPARENCY ................................................................................................................................................ 50 FACILITATED PAYMENTS .................................................................................................................................. 51 CORRELATION ANALYSIS .................................................................................................................................. 53 SUPPORTING DATA ........................................................................................................................................... 53 CONCLUSION................................................................................................................................................... 55 TO CONCLUDE: ................................................................................................................................................. 56 LIMITATIONS TO RESEARCH ............................................................................................................................... 57 REFERENCES ................................................................................................................................................... 58

Introduction
Corruption as defined by Transparency International is the abuse of entrusted power for private gain. It is when people in a position of authority misuse the decision making power they have been given at the expense of the good of others. Corruption is a crime, and it comes in various forms; for example bribery, embezzlement and fraud. It can have devastating consequences and effects on the lives of many people who are subjected to living in corrupt environments; some of the worlds poorest countries are those that are rich in natural resources; part of this problem can be attributed to poor bureaucracy and the abuse of those resources for the benefit of a few people. Not only this, the impact of corruption on foreign direct investment and the economic development of many developing countries has become more evident over the years; this topic has received a lot of attention from many scholars, organizations and institutions. Foreign direct investment (FDI) is the acquisition of production units in a foreign country into domestic structures, equipment and organizations (Gilman, 1981). Economic theories have shown that foreign direct investment is essential to economic growth; FDI also demonstrates progress in transitioning developing countries to a position where they can compete with more stabilised economies in developed markets. Corruption works to erode the positive effects of investments. It leads to the depletion of natural wealth; it can divert funds from much needed public spending such as the building of schools, hospitals and roads, to uneconomic projects, inefficient resource allocation, unhealthy market competition and weakened work ethics. Corruption in business is a two sided phenomenon involving host government officials and multinational companies. Both of these entities have a certain responsibility in ensuring that the general good of the citizens of a country are considered in business transactions. If both parties decide to behave unethically and engage in corrupt dealings, the benefits of FDI will come at a cost; although it may generate more income for host nations, the allocation of this income will be disproportioned across the population.

Research Objectives
This research paper will consider the adverse effects foreign direct investment has on corruption. It will address the issue of whether multinational companies can be held accountable for encouraging corrupt practices because of their decision to invest in nations with poor governance. Corruption allows some companies to reap the benefits of profitable markets, provided they are willing to conform and take the route of illegal rent-seeking. Countries like Brazil, Thailand and Mexico which are perceived as having high corruption levels still receive large inflows of foreign direct investment Habib and Zurawicki (2002). Government officials in these countries may not realize the seriousness of corruption especially if the inflows of FDI continue to grow, and multinational companies do not appear to be deterred by their corrupt governance. As long as they continue to receive foreign business, there may be no incentive for government officials to address the problem, or to be held accountable for their actions. The concept of transparency has become important to policy makers recently, as a method of reducing corruption. The level at which multinational companies are transparent in their reporting on foreign subsidiaries could be used as an indication of whether they are encouraging corruption in host nations. Transparency has the ability to reduce bureaucratic corruption because it makes corrupt acts riskier for both multinational companies and government officials. It helps to maintain an environment of trust and openness, and makes it more difficult for corrupt actions to go unnoticed. This leads to the sub research question: is transparency in corporate reporting an effective way of assessing how responsible a company is with regards to efforts to avoid corrupt dealings.

Methodology
In order to address the research questions and fulfill the aims of this study, a combination of quantitative and qualitative analysis will be carried out on carefully selected data. A company analysis will be carried on two multinational companies in the extractive industry, both of whom have received media attention recently with regards to their dealings in developing countries. The transparency of their corporate reporting will be tested in a thematic analysis by comparing how detailed the companies annual reports are, against recommendations made by Transparency International on what should be included in these reports. The qualitative analysis will also 4

include the evaluation of two documents, both of which are published news articles written about the companies, in relation to corruption. A quantitative correlation analysis will be carried out on three measures of transparency, as published by Transparency Internationals Transparency in Corporate Reporting paper. The relationship between the three measures will be tested so understand whether there is a correlation between them, and if it can be used as a predictive method of how transparent companies are likely to be, if the score of one measure is known.

Structure of this paper

The next chapter of this paper will be a careful and detailed review of some of the relevant theories and topics that relate to corruption. Past research and studies will be analysed, critiqued, compared and contrasted. Their relevance to this study will also be highlighted, along with any gaps in this area of research. A research methodology will follow the literature review; this will provide details and a rationale of the research methods that have been adopted in this study; the limitations of the methods will also be identified. The data collection and results chapter will collate all the data used to answer the research question. It will be presented in a clear and structured manner, followed by an analysis that links the findings to the theories presented in the literature review. The findings will be explored, drawing on any similarities, differences, and how it relates to previously discussed frameworks and theories. The chapter that follows will be a discussion of the analysis which will outline how the results contribute to existing debates. The concluding chapter will be a summary of the whole paper, how the research question has been answered, and any limitations that may have compromised the accuracy of the study.

Literature Review
Introduction
The topic of multinational companies making strategic decisions to invest in nations that are deemed corrupt has been an ongoing phenomenon. It has been widely acknowledged that despite the fact that many nations in emerging, transition and developing economies are embroiled in different levels of corruption, many foreign firms are still able to set up and grow their subsidiaries within these countries. In order to address the research question of whether companies are responsible for encouraging corrupt practices by investing in countries with poor governance, the following topics will be explored, along with the role transparency plays in corruption. This literature review will aim to identify the various factors associated with corruption by first providing an insight into different types of corruption, and how it affects both business and host economies. Some scholars have presented divergent views on corruption, and have identified advantages that can be gained by companies who choose to invest in corrupt countries, and why these countries still receive high inflows of FDI. These views will be explored and critiqued, weighing up the benefits and the costs of corruption. It will also present relevant theories, particularly the residual rights theory which provides further explanations into scenarios where companies may be pressurized to engage in corrupt dealings with government officials. The analysis section of this study will be focused on companies within a specific industry; therefore this literature review will also divulge into corruption within particular industries, with an emphasis on organizations that are set up to help combat the problem. The link between corporate transparency and corruption is very relevant in addressing the main objective of this study. There have been numerous studies carried out on how influential transparency is when it comes to reducing corruption. In trying to understand how transparency affects the way governments and companies behave, these studies will be reviewed, and to gain a better understanding of its limitations and whether it actually is an effective method. This will lead to discussions on the role corporate social responsibility plays as a measure against corruption and also its effects on how companies behave when operating in developing countries.

Corporate social responsibility bridges the gap between the legal and moral obligations companies must have when dealing with countries with corrupt governments. Many scholars, with particular attention to Rose-Ackerman have written in favour of placing moral obligations on multinational companies, based on the rationale that they are highly influential and possess the power to curb the way business is conducted in corrupt societies.

Types of Corruption
In their bid to achieve high profit margins through foreign investments, multinational companies have had to expand their operations in countries that possess the necessary market conditions, even if they viewed to be corrupt. The general and most commonly used definition of corruption is simply the abuse of public power for personal gain (Nye, 1967). There are different levels of corruption, which come with their own costs and benefits. Corruption can be grouped into three categories; political, administrative and professional (Kumar Behera, 2011). It can be argued that multinational companies are generally faced with the former two. Political corruption can involve a range of sectors with the government (legislature, local government, police, customs agents), and so can be further grouped into upper level and lower level corruption. Upper level is associated with ministers, presidents and other high ranking officials. This is also expressed as grand corruption because it usually involves large sums of money in less frequent transactions. This is corruption at policymaking stages, in comparison to administrative corruption which refers to the implementation of policy carried out by lower level officials (Bardhan, 2006). Whereas on the other end lower level encompasses civil servants in petty corruption which refers to smaller payments made on a more routine basis (Morris, 2008). Bribery is one of the obvious forms of corruption where illegal payments are made to government officials in order to gain access to certain returns which may have otherwise been impossible or difficult to attain (Johnston, 2005). Kickbacks are another form of corr uption where illegal payments are made to corrupt government officials after a service has already been rendered. Here, the official may have awarded a contract to a firm that perhaps was not the best bidder, and expects a kickback payment from the sum o f money the company receives. Embezzlements, fraud, graft are also forms of political corruption that affect the way a 7

multinational company conducts business in a host nation. Although these acts are morally and ethically wrong, and has negative effects on economies, politicians may view corruption is a means to a greater goal. Walzers study goes on to explain this further, using the example of an honest politician who cannot win an election unless he makes a corrupt deal with a ward boss by awarding a contract to the boss favourite contractor. The politician may be the best person for the job but in order for the greater good to be realized, this compromise would have to be made (Walzer, 1973). Not only do firms pay bribes to get favoured treatment in the awarding of contracts, concessions and privatization deals, they also pay to receive information, alter the terms of contracts and influence the future regulatory environment. Rose-Ackermans research into corruption and the ethics of global business found that in some cases managers claim that public officials have set up a well organized corrupt system, where bribes are an acceptable method of doing business (Rose-Ackerman, 2002). The 2012 Index of Economic Freedom highlighted the issues companies face in terms of political corruption in booming economies like Brazil. Companies often encounter requests for bribes in order to secure government procurement contracts, and to facilitate the process of starting up or closing down a business. According to the Global Competitiveness Report 2010-2011 the likelihood of a company having to succumb to the pressures of paying these bribes in Brazil is 4, on a scale of 1 to 7, where 1 is very common and 7 is never occurs.

Benefits and Costs of Corruption

In theory and perhaps through what can be described as common sense, one would assume economies rooted in corruption to be highly unfavourable candidates when it comes to management decisions being made on where to locate a foreign subsidiary. Studies carried out by Habib and Zurawicki (2002) found corruption to be a big obstacle for investment. This study was based on three years worth of data. It concluded that foreign investors avoid entering corrupt countries because they believed it to be morally wrong, difficult to manage, risky as well as costly. Corruption leads to uncertainties and ambiguity in any investment which is a major concern for investors. Habib and Zurawicki analysed that the difference in the exposure to corruption between the host and home countries can determine whether or not a company invests 8

in a foreign subsidiary. The greater the difference, the lower the likelihood of a company possessing the knowledge on how to conduct themselves in such situations. Investors would usually have a greater preference to operate in familiar territories than to divulge into unfamiliar ones where there is a greater chance of their venture being unsuccessful (Davidson, 1980). Despite these factors being apparent deterrents to FDI, latest trends have shown large inflows of multinational companies investing in countries that have been perceived to have high corruption levels such as China, Brazil, Thailand and Mexico (Transparency International). This fact emphasizes the complications associated with modeling FDI, and understanding the extent to which multinational companies are deterred by corruption. There are many variables to be considered when trying to understand a firms motives in such investment decisions. Traditionally factors such as wage rates, capital costs, market size and proximity to local markets have been considered as determinants of foreign direct investment (Brainard, 1997). Neoclassical theory states that a firm will seek to maximize its profit and value, as a main objective using investment, labour and other input factors as the main decision making variables. However further empirical studies have been carried out which indicates the existence of other factor in explaining this phenomenon. Non-traditional factors like the political stance of a country affects the decision making process of an investor. For example, corruption in the government and poor property rights laws (Biswas, 2002). This may perhaps be a true statement, but it does not take into account the fact that despite political instability, some nations are still receive to large inflows of FDI. Biswas study highlights the importance of the state of the host government. The internalisation theory (market imperfections) provides a deeper understanding into why multinational companies invest in FDI. There are advantages to be gained in an imperfect market, where there may be restrictions to the flow of products between nations, and technological, marketing or management knowledge. These are ownership specific advantages a firm will seek in order to fulfill their shareholder and stakeholder obligation of profit maximization. A multinational companys ability to gain access to these factors can determine the extent to which they can meet their expectations, however ownership specific advantages represents only a fraction of what is required. The strategic behavior of multinational companies was analyzed Knickerbocker (1972), from his study of strategic rivalry between firms, particularly within oligopolistic industries. His research states that there is an interdependency, 9

which leads to firms imitating each other. For example, if a US companies sets up a subsidiary in India, other companies within the same industry may adopt the same strategy in response. This theory certainly seems to have some relevance in explaining the large shift in many westernized companies locating their production facilities in countries like China and India. When trying to gain a deeper understanding into a firms decision to invest in a corrupt nation, it is only right to investigate the benefits that arise from such choices. It can be argued that the gains that are realized must supersede any financial costs, moral dilemmas or any other issues that are linked to these investment decisions. Firms will only take on the risk of paying bribes when the rewards are adequate and predictable (Kauffman et al, 1999). High arbitrariness in corruption is associated with unpredictability, which can make the payment of bribes to government officials appear ineffective to firms (Levy, 1989; Oldenburg, 1987). The conclusion can therefore be made that firms tend to engage in corrupt dealings when there is low arbitrariness and little uncertainty when it comes to identifying whom the right government officials are, what they are able to do and where power over residual control rights lie. The purely competitive model of a market does not incorporate moral dilemmas and obligations to abide by any moral views. In this model, the rules of the game are fixed and in a competitive market system individual actors are concerned with their own self-interest, which is essential to their survival in the marketplace. Looking at the model from this perspective can provide some explanation of why firms would resort to immoral measures in order to remain competitive and most importantly be profitable. Studies into business ethics shows that this takes precedence over any moral arguments. Managers would opt for profitable courses of action for their companies interest even if faced with ethical dilemmas. 52% of managers interviewed in the same study would hire someone to obtain technological secrets, and 58% would engage in bribe offers in order to win contracts (Baumhart, 1961). Bribes can appear justified if certain deals are important enough to the firms well-being and its main goal of fulfilling shareholders expectations (Walzer, 1973). This is especially important if being ethical has the potential of driving the firm out of business and cuts heavily into its profits, and market power. One of the arguments used in support of firms engaging in corrupt dealings is that it has the ability allocates resources such as licenses and government contracts in a more efficient way 10

(Lui, 1985). Firms that are more competent are able to make pay-offs preventing less competent firms from winning contracts and not being resourceful with it. Domestic and foreign firms sometimes view corruption as the means of a greater goal and it creates economic value in the environment of a weak government. The scandal involving Lockheed Aircraft Company is used as an example in support of this view. The company was linked with corrupt dealings to obtain a contract from the Japanese government for a Tristar airplane. Pastin (1986) analysed this case and found that there were greater benefits to the employees and owners of Lockheed and it balanced with the harm caused by the corrupt deal. He concluded that the benefits outweighed the cost because the Japanese people were not made any worse off, but their situation was actually improved since it helped them attain a more superior airplane. In this example, both the host nation and multinational company are both seen to have benefited from the illegal payoff. Donaldson poses three conditions of a hypothetical social contract between firms and society, the first being: a productive organization should enhance the long -term welfare of employees and consumers in any society in which the organization operates (Donaldson, 1989). If this condition is being met irrespective of how it is done, then perhaps corruption can at times prove beneficial. Despite there being some positive externalities associated with multinationals and corrupt dealings, there are a lot, if not more drawbacks that have been identified in past research and studies. Not only do firms stand to make losses financially, their reputation can also be at stake if their corrupt dealings become public knowledge. Companies who are associated with corruption are more vulnerable to be considered as undesirable business partners, and may find it more difficult to raise finance through shareholders equity, and attract highly skilled staff. This is because of an increase in awareness of the issue of corruption and growing interest in ethical investments. Many organizations have also set up debarment policies where companies are excluded from getting involved in their projects if they have been found to be involved in corruption. These companies stand the risk of being excluded permanently or for a number of years. This ban extends to public sector projects; the European Union Procurement Directives have made this a compulsory sanction from all EU public sector contracts. This indicates how detrimental the consequences of corruption involvement can be for multinational companies. There also are legal implications arising from corruption. A number of anti-corruption

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conventions, for example the United Nations Convention against Corruption and the OECD Convention on Combating Bribery, which aim to criminalise both domestic and overseas firms that engage in bribery (www.giaccentre.org). However firms are not the only parties who are at risk of suffering the consequences of corruption, it can be argued that domestic firms and the host nations economies have to deal with harsher drawbacks and long term negative effects. Corruption leads to inefficiencies in the market. For example in a bid for a government contracts it decreases the number of bidders and gives precedence to those who have inside connections and access to relevant information. The allocation of contracts via this method does not always lead to the most efficient party winning, and can introduce higher transaction costs for firms. Kaufmann and Wei (1999) carried out research in this area and found that companies that pay more bribes actually waste a lot more time negotiating with bureaucrats and officials. Shleifer and Vishny (1993) also have found that corruption is more damaging to firms that taxation because of these transaction costs, higher uncertainty and the fact that corrupt contracts are not enforceable in courts. The rate at which a firm grows is negatively affected by its involvement in corruption, particularly bribery. Empirical data analysis on Ugandan firms has shown that a percentage increase in the bribery rate leads to more than a three percent reduction in a firms growth (Svensson, 2003).

Corruption and Competition

Competitiveness is reduced as a result of corruption because investors may be unwilling to bear the costs of conducting business with corrupt government officials, leading to retardation in the level of foreign direct investment within the host economy. The GDP growth of the nation is in turn affected, a negative correlation has been found between that and corruption based on a cross-country analysis by Mauro (1995). A corrupt economic does not provide a platform of a fair and efficient market needed for economic development (Boatright, 2000). Competitors in that market no longer compete on price and quality, but rather who has the ability to pay the highest bribes. When officials in developing countries are presented with opportunities to maximize their own personal gains, they may choose projects that deliver no economic rationale. This self-centeredness leads to short term gains for themselves and long term costs for their 12

economy. For example they may opt for capital investment projects that hold little economic justification, and spend less on improving the nations infrastructure, unemployment leve ls and operations (Tanzi and Davoodi, 1997). The economic development of the nation is thus affected, due to the lack of public investment. The group that probably suffers most of the consequences of corruption is the people of the host nation. The lack of adequate infrastructure leads of poor transport, education, healthcare, and workplaces, which overall affects their quality of life. Corruption can offset a cycle of deeper corruption and poverty, due to loss of earnings and high unemployment rates. These factors combined with the financial costs to both firms and the host nation certainly draws to the conclusion that corruption leads to severe social and economical damage, overriding any benefits that are realized.

Theory of Residual Rights

The theory of residual control of the firm (Grossman and Hart 1986, Hart and Moore 1990) can be used in efforts to understand the core reasons why multinational companies actually resort to paying bribes to government officials. This theory goes beyond the obvious assumptions that are made, and incorporates the struggle of ownership of property rights between the firm and the corrupt host government. The existing patterns of corruption in a country have a great effect on a firms likelihood to bribe. The residual contr ol theory states that the behavior of a firm depends on who owns the residual rights to control the firms assets; these are assets that are not covered by contractual terms (Foss and Foss 1999). The main assumption behind this theory is that real world contracts are incomplete because it is impossible to effectively allocate and specify controls rights prior to the contracts being executed. This leaves the ownership of some residual rights unspecified. This theory can be further linked to the issue that human beings are limited in their strategic choices by bounded rationality. This concept that describes the constraints decision makers have to work under. The first constraint is the availability of limited information on which decisions are based on, the limited capabilities of the human mind when evaluating the available information and finally the limited time available to make those decisions. Firms have to make rational choices based on two kinds of guesses; about future consequences of their present actions and about future preferences for those consequences (Savage, 1954; Thompson, 13

1967). These guesses have to be made under uncertainty, which is made especially more challenging and complicated in the conditions of corruption. In this case their ability to construct complete contracts that encompass all aspects of control rights is restricted by lack of full knowledge and precision in their guesses based on the information available to them. Taking this further, it can be said that politicians and governments of a country have a certain level of control over residual rights and are therefore able to impose rules and regulations on firms, in their favour. Although property rights should be owned by firms wholly some governments still maintain power over these rights, thus affecting a firms vulnerability and exposure in that host nation. It is important to analyse and understand the vulnerability of firms to corruption, in order to address the main topic of this paper of why they would choose to invest in these conditions. A firms vulnerability is defined as its ability to resist stresses and pressures placed on them by exogenous events (Lee, Oh, Eden 2010), and the level to which they are exposed to these stress factors. This is linked to how frequent the firm comes into contact with the corrupt bodies/officials during its operations in the host nations. It may be a case where there is minimal contact and therefore little exposure, which reduces the firms vulnerability. In this ideal scenario the level of corruption may not have much influence on decisions to engage in business activities, because the firm will not be subjected to pressures to pay bribes in order to survive. Another factor which impacts the firms vulnerability to corruption is the level of bargaining power they possess in comparison to the government. Fewer bribes are demanded from firms that have greater bargaining power (Hakala et al. 2005, Svensson 2003). Studies have shown that bargaining power of multinational companies rises as its percentage of foreign ownership increases (Eden et al. 2005, Vernon 1971). Host governments are faced with the dilemma of firms pulling out their investments if corruption is deemed to be too high, and as a result of this threat may actually in turn limit the pressures on them to bribe. Data published by The International Bribe Payers Index (Transparency Index 2006) shows that domestic firms are actually more likely to bribe than foreign companies. Of course, this again is dependent on who possess more residual control rights. If the benefits a firm can reap from their investments are greater than the costs associated with doing so, and this is knowledge known to the host government, then the ownership of bargaining power will be reversed. However the former view point may be used to explain why some multinational companies invest and are able to thrive in

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corrupt nations whereas others choose to give up potential business opportunities. It is all linked with bargaining power, and not wholly on the environment or a firms moral beliefs.

Corruption and Industry

Another variable that has an effect on firstly whether a multinational company is required to bribe and secondly how much bribe is needed to facilitate access to resources, is the industry in which they operate in. Industry level characteristics can determine which side the bargaining power of transactions lies; government officials or firm. This can be explained by analysing the characteristics of export orientated industries; national governments in developing countries with balance of payment deficits will be more inclined to behave in a way that promotes exports by multinational investors (Grosse 1996, UNCTAD 2006, Vernon 1971). This gives export orientated firms more bargaining power, and may even be rewarded grants and other financial incentives for continual engagement in export activities. For firms of this nature, their vulnerability to corruption is considerably lower in relation to others, and as a result may strategically decide to continue conducting business in this environment. Empirical studies carried out by some researchers have supported this view point where a weakly negative relationship between export orientation and bribe payments was found (Lee, Oh, Eden 2010). However this is dependent on if the country has a policy of boosting the level of exports. In the case where this is not a priority, export taxes may be a determinant in a firms decision making on whether to pay bribes to avoid charges, especially if they account for a high percentage of profits. Also, from an alternative perspective developing countries that aim to increase exports by providing financial incentives may induce more competition between firms, and again could raise the level of bribery. The same study also fo und that a firms exposure to corruption does in fact vary between industries. The Extractive Industries Transparency Initiative (EITI) is a globally accepted standard which aims to increase transparency in the financial disclosure of companies in extractive industries. The EITI consists of governments, companies, civil society groups, investors and international organizations (www.eiti.org). Transparency Internationals Corruption Perception Index found that countries that are rich in natural resources are also some 15

of the poorest, due to corruption (www.transparency.org), which makes the existence of EITI even more necessary. Corruption in this industry can take place in many areas, the first being in project identification. Here, government officials may choose to approve projects for their own illicit benefit, and reward contractors with lucrative deals in return, or demand facilitated payments. It also occurs in the financing of projects, planning and design phases, project execution and operation and maintenance phases. With extractive industries being so profitable, especially with the benefits that arise from winning contracts, firms are presented with both high exposure and vulnerability to corruption; at times offering bribes can be the only way to ensure contracts are awarded in their favour. An increase in these corrupt activities in a country can lead to corruption appearing more attractive, and the likelihood of being caught, reduced (Murphy et al, 1991).

Corruption and Transparency

There have been many studies carried out with the aim of identifying the causes of corruption, measures that can be taken to reduce the negative externalities that arise from it, and how it can be prevented. Transparency has been a topic of interest to many scholars; especially with regards to how it relates to corruption levels however only a few empirical studies have been conducted to study the effects of transparency on corruption due to difficulties in measurement. It has been defined as the release of information that allows the evaluation of institutions to take place. It has been viewed as a major factor in reducing corruption particularly in countries that are rich in resources but poor in bureaucracy. Economists have discovered the important role transparency plays in avoiding market failure and improving efficiencies in resource allocation (Stiglitz, 2000). Kolstad and Wiig (2009) conducted a study into the mechanism through which transparency can reduce corruption, with the argument that transparency is not sufficient, but will only be effective when combined with other policies. They make the claim that the role transparency plays in reducing corruption has been poorly understood; although there is evidence that shows a correlation between low transparency and high corruption levels, there are many limitations to this concept. Transparency can increase the likelihood of corrupt acts being detected. In relation to the oil industry, the more transparent the cost structure of the oil

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company is the harder it is for officials to misrepresent information, with a higher chance of being caught. The study concludes that a lack of transparency can make corruption appear less risky and more attractive to unethical bureaucrats and corrupt governments, not only this; it also acts as an incentive for poor behaviour and creates an environment where officials cannot be trusted. The paper also concludes on some divergent views of the effects of transparency. In some cases transparency may actually lead to an increase in corruption. Bac (2001) suggested that even though transparency makes the detection of corrupt officials easier, it also reveals the identities of the relevant officials that can be bribed. It can aid companies who seek to obtain contracts through facilitated payments in knowing who to contact and bribe. Bacs (2001) study makes a very interesting claim that small improvements in transparency is what is likely to increase corruption, whereas large improvements can reduce it, based on his earlier analysis.

Lindsted and Naurin (2010) investigated the ways in which transparency can be made effective in reducing corruption. The main aim of their study was to test the commonly accepted statement that making political institutions more transparent is an effective method for reducing corruption. They found that simply making information available is not a good prevention mechanism of corruption if other factors such as media circulation and free and fair elections are weak. The paper identifies and distinguishes the difference between two types of transparency; the first being transparency that is controlled by an institution under supervision, and the second being transparency that is not under their control. Corruption is affected differently and by different strengths depending on the type of transparency applied. For transparency to be an effective method the information released has to reach the public; this is known as the publicity condition. Secondly the public need to have some sanctioning mechanisms in order to influence the behaviour of corrupt government officials; this is the accountability condition. These two conditions are important links between transparency and corruption, and are requirements in the prevention of corruption. Similarly to Kolstad and Wiig (2009) their research concluded that increases in transparency is not a sufficient means for reducing corruption, but it needs to be complemented by other measures that give citizens more power to act on the available information.

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Not much research has been carried out in the past that focuses on the relationship between transparency in corporate reporting and corruption levels. However transparency International released a report on Promoting Revenue Transparency (2011), and found that oil and gas companies reveal very little data on their operations in host nations, and there is significant room for improvement. A recent legislation passed by the US Securities and Exchange Commission (SEC) requires oil and gas mining companies that are listed on the US Stock Exchanges to disclose details of any payments made to foreign governments, in an effort to curb corruption. These organizations have placed a high importance on making multinational companies accountable for their actions in host nations, through transparency in facilitated payments. What is not understood as much is whether this will actually have an impact on corruption levels; this paper will aim to explore this thought in more detail.

Corporate Social Responsibility

There have been many debates over the years on the concepts and definitions that adequately describe corporate social responsibility (CSR). Marrewijk (2003) provides an overview of this, stating: An intensive debate has been taking place among academics, consultants and corporate executives resulting in many definitions of a more humane, more ethical and a more transparent way of doing businesses. Andriof and McIntosh (2001) suggested that another reason for the difference in opinions is the problem of language barrier between nations. Further studies carried out other researchers including Andriof and McIntosh (2001) who claims that CSR in developing countries can be defined as the formal and in-formal ways in which business makes a contribution to improving the governance, social, ethical, labour and environmental conditions of the developing countries in which they operate, while remaining sensitive to prevailing religious, historical and cultural context. Rose-Ackerman describes corruption as two sided phenomenon that cannot be entirely blamed on multinational companies who enter developing countries. However her studies have focused primarily on the role firms play in trying to combat corrupt acts, and actively making efforts to limit the number of corrupt dealings that take place. It has been a debate for a number of years just how much responsibility should be placed on firms to take on the role as moral actors in 18

the quest to control corruption. This has become a prominent issue in recent years, with companies being increasingly scrutinized for their unethical behavior and failure to incorporate this ideology into their strategies. Bowen (1953) echoes this issue stating that it is the obligations of businessmen to pursue those policies, to make decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society. Donaldson (1989) presents the theory that there is a hypothetical social contract between a firm and the society in which they operate in. in this contract, citizens in that society would accept firms operating within their territory if the benefits of increased productivity outweigh the costs it brings. It can be understood from this view that firms perhaps do have a certain level of moral obligation to comply with the terms of the social contract, and to refrain from any activities that compromise the benefits that are supposed to be realized, and adhere to their part of the deal. Even if illegal pay-offs and bribes may be seen as contributing to a greater good in the long run, the action in itself undermines the efficiency of the marketplace, and creates and environment where corrupt actions become increasingly acceptable as normal business practice. Not only this, but corruption acts as a deterrent for entrepreneurs and other business hopefuls from entering the market. Research by Ades and Di Tella (1997) and Wei (1997) found a link between foreign direct investment levels and corruption and the quality of governance in a country. This further reinforces the need for firms to behave ethically, to preserve an efficient and friendly market place: a condition necessary for their own growth and success.

Vogel (2005) debates on what it means to be a virtuous company and whether there is for market for companies to be virtuous. Many firms have including as Nike, Ikea and Starbucks have taken steps in recent years to exhibit a degree of corporate social responsibility through practices that improve the workplace and benefits to society. Many publically known multinational companies have gone beyond their legal obligations to be ethical, however Vogel (2005) raises the question of what these actions signify. He acknowledges that corporate social responsibility encourages firms to adopt policies and strategies that generate benefits to society and to firms themselves, by increasing profits and creating new markets. However there are clear limitations to CSR; it is voluntary, and so firms only engage in it as far as it makes business sense to do so. It does have the ability of correcting some market failures but to a certain extent; firms cannot be made by

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law, to adopt strategies that are unprofitable but beneficial to society. It is therefore questionable how much of an impact CSR has on businesses when it comes to their decision making. Some firms may simply view it as a requirement to surviving in a business environment where the behavior of companies is under increasing scrutiny from the public. The motivation behind the decision to be more socially responsible can vary between companies, and is an important factor when trying to underpin the benefits of CSR. It will determine how committed a firm is to its goals to be ethical and mindful of society, and the degree to which they will expend themselves to ensure that profit maximization is not their only aim.

Summary of Chapter
There are evident links between CSR and the globalization of worldwide marketplaces. Multinational companies have gained so much power that from some perspectives that can be seen as being more powerful than some governments in nations they operate in. Large firms are vulnerable to pressures from activists to engage in sound business practices, even if they are not legally required to do so. They stand to not only improve their reputations, but are also able to increase their profit margins, customer loyalty, and operational efficiency.

A lot of the written literature and theories published on corruption and the role of CSR divulges into the consequences, costs and moral obligations firms should have towards investments in corrupt nations. After reviewing the available literature, the question that is still left debatable is whether multinational companies engaging in business in these nations can be seen as encouraging the poor governance structures that are in place. Even if a multinational company does not engage in any corrupt dealings, it is definitely important to analyse if their mere presence could be deemed as encouraging. A country like Brazil continues to receive large inflows of foreign direct investment, with an increasingly expanding economy, and yet has a bureaucracy that is considered as corrupt. This in some respect can lead the government to overlook the seriousness of corruption, and to set in place effective measures of prevention and deterrent. Although it is impossible to expect a profit seeking multinational company to refrain from investments in such nations, it could perhaps be viewed as their corporate duty to take more of an active stance in discouraging corrupt bureaucrats and not conform to the pressure. 20

Companies could also adopt more transparent methods of corporate reporting, to shed light on any wrong doings, and to make host governments more accountable for their unethical behaviours. This study will draw on the importance of transparency in corporate reporting, and corporate social responsibility in dealing with corruption.

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METHODOLOGY
Introduction
The purpose of this research paper is to firstly gain an in-depth understanding into business and corruption, particularly how it affects foreign direct investment. Secondly, to analyse the reasons why multinational companies choose to make investments in countries that are known to be rooted in deep corruption despite the risks associated. This will lead to the main research topic of this work which is: Are companies responsible for encouraging corrupt practices by investing in countries with poor governance? Over recent years, many researchers have carried out studies into the area of corruption, both quantitatively and qualitatively, to try and explain the phenomenon. The most closely related is the study by Rose-Ackerman (2002), who tackled the issue from the angle that multinational companies should not only focus on profit seeking incentives but are also obligated to refrain from corrupt dealings. I aim to fill the gap in this particular work by actually trying to divulge into the consequences that arise from multinational companies investing into these poorly governed nations, and whether they can be held responsible for encouraging corruption merely by their presence. This chapter will first review the different research methods that can be adopted in this study; it will highlight the advantages and disadvantages of the available methods. A rationale will be presented for the chosen methods with a focus on why they are suitable for this type of research. The research design will be explained in this chapter, along with the limitations associated with it.

Research Methods
Qualitative Research I will adopt a qualitative approach in the main part of the analysis in this study, because of the nature of the research question. It is important that the method adopted not only generates results but also helps identify the reasons why companies could be held responsible and at the same why they may not be. Qualitative research is very effective in obtaining information on opinions, motivations, and values from the subject focus, and produces results that can be applied to other areas of this topic. There is a greater flexibility when using qualitative methods, compared with quantitative; for example the in the case of an interview, participants in a study will be able to give open ended responses that may prove more useful and informative than close ended 22

questions. Greater levels of detail can be extracted that can allow for comparisons between findings, and tangibility in results. Qualitative research further branches out into various methods, the main ones being participant observation, interviews and documentary analysis. Observations are particularly useful when a researcher is trying to explore the natural behaviours of a study group without obstructing or disturbing the situation. For the purposes of my study, this is clearly not a suitable method to use because it would be difficult and near enough impossible to ethically gain a realistic impression of how companies behave in corrupt countries from observing them. Carrying out interviews can also be an effective method to use, whether it is done formally or in the form of a casual conversation. A lot of information can be obtained via this route, and has the potential to have a high accuracy; however this is partly dependent on the conduct of the researcher themselves. They would need to be experienced and skilled enough to be empathetic with the interviewee to win their confidence but not in a way that sways their views. In my topic of corruption, particularly involving multinational companies, it would be extremely challenging to be given the opportunity to interview relevant people from not only one, but multiple companies in order to have reliable results. This issue is also highly sensitive and will be unlikely to get many multinational companies to participate truthfully. After evaluating all the various techniques, I have chosen to employ a secondary qualitative method that uses a combination of written official documents from companies and other organizations, as well as news reports, as data sources.

Quantitative Research A quantitative method will be used to carry out a correlation analysis on data published by Transparency International. This analysis will generate correlation coefficients, which are numbers that describe the degree of relationship between two variables. A score of 1 will indicate a perfect positive correlation, -1 will indicate a perfect negative relationship and 0 will indicate no relationship at all. The analysis will be carried out between three measures used by Transparency International in their assessment of 105 companies. These measures are: organisational transparency, anti-corruption programmes, and country by country reporting. Before the coefficients are calculated, a scatter diagram will be constructed on Microsoft Excel, using the scores published by Transparency International. The coefficients will also be calculated 23

using Excel. Although the results will present the level of relationship between the measures, it will not show which variable causes a change in the other. Research from the literature review, the news articles and results obtained from the qualitative analysis will be used to either support or disprove the findings of the correlation analysis.

Secondary Data Secondary data is simply the use of data that has already been collected and collated by an existing researcher, for their own purpose. Fertman and Allensworth (2010) highlights that this type of data allows a researcher to gain a wider perspective of a particular topic, it especially provides an overview of how to the topic can be addressed. Different approaches to the topic can also be analysed from secondary data. Again, as corruption is such a widely researched area, it is not necessary for me to collect primary data; there are enough published research and studies available to be able to address my research question sufficiently, and draw on reliable conclusions. Although primary data is more up to date and potentially more reliable, as it eliminates the issue of accuracy and precision associated with using someone ones research, it can be quite costly, complicated and time consuming to acquire. This problem can be overcome to a certain degree by collecting secondary that was generated as close to the research period as possible; so in this study I will use case studies, articles and documents that were published as near to the present as possible. This will be made less challenging because corruption receives a lot of attention from large organizations such as Transparency International who frequently updates their information centre with the latest corruption news.

Research Design
The Transparency in Corporate Reporting: Assessing the worlds largest companies report released by Transparency International will be used as a source of secondary data used to understand how transparent multinational companies are when it comes to reporting their anticorruption programmes in different countries, transparencies in their disclosure of related entities such as subsidiaries, and finally their country by country reporting. The report emphasizes on the impact multinational companies have on the global economic community, and the difference

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they can make in the efforts to combat worldwide corruption in crippling economies by adopting greater corporate transparency. The recommendations outlined in this report for what should be included in the narrative disclosures in companies annual reporting will be used as criteria for two company studies. The narrative disclosure of a companys report is the non financial information that provides a broad overview of their business. A good disclosure will give account of social and environmental issues in a meaningful and useful way to their shareholders and other interested parties. The key recommendations made by Transparency International will be used as themes in the analysis; these themes will then be identified in the narrative disclosures of the chosen companies, and linked to form a comprehensive conclusion from the findings. The three step formula suggested by Pat Bazely (2009) when it comes to using themes as a method of qualitative data analysis is to first describe, compare and relate. Here, the first theme will be described, along with details about the data; its characteristics and boundaries. Next, the differences in the characteristics and boundaries across the two company cases will be compared for each theme. It is important to note at this stage that themes may be expressed differently by the companies, which is why the analysis has to be carefully and thoroughly carried out. Any relevant similarities and variations will be recorded. The final stage is to relate the theme to others already written about. Theories outlined in my literature review by other researchers will be used, looking at how they relate to each other.

Limitations
There are some limitations to using reports created by companies themselves as sources of data. A good narrative disclosure should inform of the companys story in an affective, balanced and truthful way, without distortions. There needs to be consistency and clear presentation so that the companys strategies are easy to understand. Because this information is inevitably for the benefit of shareholders, a companys narrative disclosure may not be totally accurate especially if they are trying to conceal or exaggerate information to appease shareholders concerns. The report on Corporate Transparency in Reporting was collated by Transparency International from data made publically available on companies websites. Therefore the results presented by 25

the report are based on the data collected and analysed from the companies that participated in the study. This can be a limitation to the relevance of the report in my research; even though the sample size used by Transparency International is large (105 largest publically listed companies), it does not reflect the truth for every multinational company. Another limitation to this data is the fact that it is based on information published between June and 15 th October 2011. Some relevant information may have been published by companies after this date, which will not be reflected in the results generated by the report. However the information does hold an adequate enough level of reliability to be used for this study; it analyses the reporting practices of multinational companies from diverse industries and countries. This organization also holds high credibility worldwide, and their annual reports are recognized and utilized by many research groups.

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DATA

Introduction
To achieve the aim and objectives of this research, qualitative data has been compiled from different sources. The first data source that will be analysed is the Transparency in Corporate Reporting paper published by Transparency International. The findings of the report will be used to carry out a correlation analysis based on the three transparency measures outlined by the organization.

The data retrieved from the corporate reporting report will be used carry out the comparison between the two companies that have been chosen, and will also serve of a reference point for what should be included in the annual reports published by the companies. Transparency International holds a high credibility in the methodologies they employ when carrying out their studies, and is therefore assumed to be an accurate enough reference point for the purposes of this study. This section will first outline the how Transparency International compiles their information, what their aims of their studies are, in order to fully understand how they generated their policy recommendations for companies. The results obtained from their research will also be highlighted, and how transparent multinational companies should be when it comes to their corporate reporting.

An analysis will be carried out on two articles; the first will be a news report published on Shell regarding their recent encounters with their subsidiary in Nigeria. The second article will be of a similar nature published on Tullow Oil about their Ugandan operations. Both articles will be summarized, detailing the relevant and important points that will contribute to this study.

In this section, the results from the correlation analysis will be presented with the aim of highlighting any relationships that may or may not have been discovered from the analysis. The results obtained from the two companies annual reports will be analysed according to the three step formula identified in the methodology; describe, compare and relate. The analysis will be presented clearly and constructively by focusing on one theme at a time; comparing the data

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gathered from both companies, drawing on their similarities and differences and finally relating the findings back to theories and studies carried out by other researchers.

Transparency International Data for Correlation Analysis

The table below presents the results of the study carried out by Transparency International, based on the three anti-corruption measures: anti-corruption programme, organizational transparency and country by country reporting. The 105 companies that were analysed are scored according to how compliant they are across these three areas. However for this research the names of the companies are irrelevant and are therefore excluded. A correlation analysis will be carried out on the results, in order to test whether there are any relationships between the three measures. For example, if a company appears to have a weak anti-corruption programme, are they also likely to have poor scores in the other two areas? Perhaps a weak scoring in one area can be used to predict how transparent a company is in their reporting in other areas. Even though this will not altogether generate a definite answer of whether a company behaves ethically, it provides an indication of their efforts to not conceal their operations. By undertaking a correlation analysis on the three factors, this study will help to determine how interdependent the measures are. The scores are arranged from the company with the highest, to the lowest. Transparency International calculated these percentage scores by awarding a maximum score of 1 for every question in the questionnaires filled out by the participating companies. For example, in the anti-corruption programme section companies were required to answer 13 questions, so the maximum score is 13 which will indicate 100% transparency/presence in anti-corruption measures.

From simply looking at the results below it is evident that many of the companies scored high percentages in their organisational transparency. This implies that the companies tend to provide adequate information in their reports of their fully owned subsidiaries, however according the Transparency International not many companies provide information on other affiliated entities, such as joint ventures, and therefore many of these entities remain undisclosed to the public. Only two companies attained a score of 100% in relation to their anti-corruption programmes, 28

and some scored 0 on this, averaging 68%. There appears to be much room for improvement on this factor, and greater emphasis on the importance of these programmes needs to be made in company reports. Country by country reporting generated the weakest scores in the survey. With the highest score being only 50% and many scoring 0, the data shows that country by country financial reporting is not carried out by a lot of these companies. This may be because they are not required by law to do so, but only to comply with the accounting standards of the main countries of operations.

ACP 100 92 92 85 100 92 100 81 92 88 69 92 88 85 77 88 88 85 85

OT 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

CBC 50.0 23.7 23.6 21.3 2.4 8 0.0 17.2 5.6 8.5 26.2 1.8 4.3 7.5 14.0 0.8 0.6 2.4 2.1

ACP 85 85 69 81 81 96 81 81 81 73 77 77 77 92 73 65 62 69 46

OT 100 100 100 100 100 83 100 100 100 100 100 100 100 83 100 100 100 100 100

CBC 0.8 0.6 15.5 2.3 2.0 1.7 0.3 0.0 0.0 6.3 1.7 0.9 0.4 1.3 3.6 8.8 8.3 0.4 17.3

ACP 46 62 77 85 69 54 92 85 85 96 81 77 77 92 54 23 88 88 73

OT 100 100 83 67 83 100 58 67 67 50 67 67 67 50 83 100 50 50 67

CBC 15.9 0.0 0.0 5.6 4.2 0.0 1.7 0.0 0.0 3.3 0.3 0.0 0.0 0.0 4.9 18.3 2.2 2.1 0.4

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ACP 38 85 31 62 81 31 81 46 77 92 88 38 88 69 69 69

OT 100 50 100 67 50 100 50 83 50 33 33 83 33 50 50 50

CBC 0.0 0.4 1.7 4.2 1.2 0.0 0.0 0.5 0.4 0.0 1.7 0.0 0.0 0.8 0.7 0.0

ACP 85 15 15 81 81 77 77 77 73 77 69 69 69 50 50 65

OT 33 100 100 33 33 33 33 33 33 33 33 33 33 50 50 33

CBC 0.0 1.3 1.1 0.0 0.0 0.0 0.0 3.2 0.0 0.0 0.6 0.0 0.0 0.0 0.0 0.0

ACP 46 62 62 38 23 54 62 46 0 27 27 38 8 8 0 0

OT 50 33 33 50 67 33 25 33 83 50 50 33 50 50 50 33

CBC 1.3 0.0 0.0 5.5 0.2 0.0 0.0 4.3 0.0 6.0 0.0 0.0 0.0 0.0 0.0 0.0

Table 1: Company scoring from Transparency Internationals Transparency in Corporate Reporting study. ACP = result for reporting on anti-corruption programmes (%) OT = result for organisational transparency (%) CBC = result for country-by-country reporting (%)

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Results of Correlation Analysis

The figures below present the results obtained from the correlation analysis carried out on the data collected by Transparency International. ACP CBC 0.143496 OT CBC 0.392847 OT ACP 0.126605

ACP = anti-corruption programmes OT = organisational transparency CBC = country-by-country reporting

The correlation coefficients show the level of interdependency between the three measures used by Transparency International in their study. The first demonstrates a weak positive relationship between the levels of anti-corruption programmes and country by country reporting. This means that the stronger the anti-corruption programmes a company establishes, the more transparent they are likely to be with their country by country reporting. Correlation analysis does not identify which factor is the dependent variable and which is the independent. A score of 0 would have indicated no relationship at all; however such a weak score does not allow a definitive conclusion to be made on the interrelationship between the two measures. Similarly the last correlation coefficient shows a weak positive relationship between organisational transparency and anti-corruption programmes.

Stronger positive relationships were expected to be generated from the correlation analysis; however there are some limitations that may explain the unexpected results. Firstly, with regards with country by country reporting, many companies are not required by law to detail all information on their entities. For example accounting standards differ between countries, and companies like Shell and Tullow Oil are only required to publish individual financial statements for their home operations. This can be used to explain why many of the companies included in the study by Transparency International scored weakly on this measure. Both Shell and Tullow

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Oil also failed by publish extension details of all their subsidiaries in the countries they operate in. Therefore, it is impossible to assume that a company that has good anti-corruption programmes will also report greatly on their country by country operations, or be organizationally transparent.

The second analysis shows that there is a moderately positive correlation between organisational transparency and country by country reporting. Ideally a score of 0.5 and higher would be optimum in determining a strong relationship. However this correlation was the highest out of the three, indicating that companies that are transparent with their corporate reporting also to be transparent with their country by country reporting. The study by Kolstad and Wiig (2009) into corruption and transparency can be used to give a greater understanding of this correlation. Their study showed higher transparency is associated with lower levels of corruption. Companies who are involved in corrupt acts are unlikely to provide adequately detailed reports of the countries they operate in. There is a level of secrecy that comes with unethical behaviour from multinational companies. Not only do companies stand to suffer reputational damages, but also face legal implications by organizations like OECD if found to be engaged in corrupt practices. Conversely, companies who seek to improve their public reputation and present themselves as ethical entities are likely to provide as much information as possible on their dealings in other countries. As stated in the literature review, companies like Nike, Ikea and Starbucks have made special efforts to exhibit their commitment to being socially responsible and encourage practices that benefit society.

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Transparency International Data

The Transparency in Corporate Reporting report measures the transparency of the chosen companies on three main criteria: public reporting on anti-corruption programmes, organizational transparency and country by country reporting. The first criterion cover programmes on bribery, facilitation payments, whistleblower protection and political contributions. Here, the companies were asked 13 questions all of which are related to the policies and measures they have put in place not to engage in corrupt dealings, and to deter it. Each company is then given a score according to how many of the anti-corruption measures are being executed. The second criterion measures the extent to which the company discloses material on all their entities, subsidiaries, joint ventures and the countries in which they operate in. This is important because it ensures that all cash flows and contracts are traceable and can be accounted for. For this criterion, materiality can pose a challenge. Materiality is defined by the accounting standards and regulations set by a country. However this sometimes differs between nations; some standards may require more or less information to be published by companies. Therefore for some entities, a company may not report adequately on their financial information. The final measure is on their country-by country reporting. Companies are asked five questions based on how much reporting they disclose on the financial accounts in all the countries they operate in, including revenue, income and community contribution. Community contributions in particular are an indication to local citizens and the public how much companies are committed to developing the community. These criteria are all fundamental to transparency. Companies reporting on these three elements provide a clear picture of their operations for stakeholders to influence the behaviors of the corporation. It indicates to the stakeholders and other interested parties that they are committed to being ethical, and it allows for the identification of unlawful acts, and rectifications to be made. Transparency International concludes that companies who are transparent on all these factors and report efficiently on their operations are likely to be part of the solution rather than the problem, when it comes to corruption.

Based on these results obtained from companies, Transparency International produced policy recommendations not only for companies, but for investors, civil society organizations and government and regulatory bodies. For the purposes of this study, the focus will only be on the

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recommendations made for companies, in terms of what they should include in their financial accounts and narrative disclosure. An explanation of why each recommendation was made will also be given. The recommendations are: 1. Anti-corruption programmes should be made publically available. Any such reporting increases and credibility and accountability. It brings attention to the anticorruption efforts being made by companies, and presents them in a good light to stakeholders and supports employees. Internal policies on anti-corruption measures should also be reported.

2. Companies should publish exhaustive lists of their subsidiaries, affiliates, joint ventures and other related entities. They should also include information on the companys operations, for example the kind of business it conducts. Some companies tend to only report on their material subsidiaries and exclude the ones that arent however it is important in understanding the compa nys tax structure and anti-corruption compliance; especially for multinational companies operating in developing countries with poor tax laws. Even though the scale of the subsidiary may be small to a multinational company, it can be significant to the host nation, and so should be included in their reports.

3. Companies should publish individual financial accounts for each country of operations. This may be a small effort by multinational companies because they already possess the necessary information; however it can have a big effect on the countries in which they operate; it sets a standard for other companies that are in the host country who may then decide to be more transparent with their financial reporting. It also helps to monitor the effect the company has on the local economic development, and their commitment to supporting communities.
These are the three main relevant recommendations made by the report; however from further analysing other information presented, a fourth has been found which also appears highly relevant.

4. Companies should indicate that facilitated payments are prohibited, and should report on
monitoring procedures. There is significant room for improvement with respect to the content of anti-corruption programmes reported by companies.

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Company Data
An analysis will be carried out on two major oil and gas multinational companies, who have both received media coverage and public attention with regards with how far they take their corporate social responsibility. The first set of secondary data that will be used in this research is the Annual Report published by Tullow Oil Plc for 2011. This company has been chosen due to their involvement and great efforts to behave ethically in the countries they operate in. Tullow Oil has operations in some of the developing countries that have been labeled as having corrupt bureaucracies, and so their report will be analysed extensively to understand how far the company actually goes to avoid this problem, to not encourage it, and how transparent they are in their narrative disclosure and financial accounts. The information obtained from this data can be linked to some of the theories and studies identified earlier in the literature review; the most relevant being Rose-Ackermans (2002) study on the responsibility multinationals have to discourage corrupt dealings.

The annual reports published by companies tend to be highly extensive, and contain a lot of information. The relevant data that will be extracted from the reports by Tullow Oil and Shell will be displayed using a reduction method. This is when large quantities of data is organized, summarized and simplified. It presents the information in a more manageable manner, and helps to focus on the parts of the data that is required for this study. As well as this, the data will be presented in a table form for each company in relation to the policy recommendations made by Transparency International; which will be used as themes later in the analysis section. Any evidence discovered from studying the reports that relates or meets the recommendations is recorded. The table below presents the summarized data:

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Themes Anti-corruption programmes should be made publically available.

Data evidence obtained from report Launch of Tullow Code of Business conduct in 2011 which has been embedded in all employee contracts and supplier contracts. This is made publically available on the companys corporate website. It covers: 1. Gifts and hospitality policy and online register. 2. Guidance on avoiding facilitated payments and expenditure on Foreign Policy Officials. 3. Conflict of interest declaration form. 4. Awareness training programme. Member of Transparency Internationals Corporate Supporters Forum and supporter of EITI (Extractive Industries Transparency Initiative). Group-wide awareness programme in 2011 for employees and contract staff covering the new Code and the UK Bribery Act. Tullow Oils compliance team hosted a compliance workshop in Bangladesh in 2012, providing an overview of anti-bribery legislation. It also outlined Tullow Oils compliance expectations of industry partners. To ensure there is good ethical practice through their entire supply chain, the company is undertaking bribery and corruption training with their suppliers.

Companies should publish exhaustive lists of their subsidiaries, affiliates, joint ventures and other related entities.

The company operates in 22 countries with more than 100 licenses. Their report provides the names of all the countries, including the regions they belong to.

Report also contains information on the type of business activity that is carried out in each country, whether it is exploration, production or development.

Provides information on where the key offices are in each region, including details on the number of employees, the number of licenses, level of production.

Key business developments in a number of regions are also provided.

Companies should publish individual financial accounts for each country of 36

In their annual report, Tullow Oil provides group financial statements, comprising of a group income statement, group statement for income and expenses, a group statement of changes in equity, group cash flow statement and finally a group balance sheet.

operations.

Tullow Oil complies with the International Financial Reporting Standards (IFRSs) supported by the European Union.

All financial information is provided in one currency only; the dollar. Following the group financial statements, Tullow Oil also provides segmental reports, dividing the group into the various geographical regions they operate in: Europe, South America and Asia, West and North Africa, and South and East Africa.

The company presents revenue, profit, and asset and liability financial information for each segment. They also restate the financial accounts for 2010 and 2009 in accordance to the newly adopted segmental reporting strategy.

Companies should indicate that facilitated payments are prohibited, and should report on monitoring procedures.

In their Industry Partner compliance workshop hosted in Bangladesh in 2012, Tullow Oil emphasized the importance of due diligence and the effects of noncompliant behaviour.

The company also provides details of their confidential reporting line, which can be used by employees to bring attention to any acts that go against their policies.

The company provides information on gifts and hospitality policy and facilitated payments guidance; an issue which the company recognized as being of particular interest in developing countries.

Employees are expected to be responsible, and exhibit the values of the company, following their code and conduct themselves in a fair, honest and ethical manner.

The staff is given the opportunity to confidentially raise any concerns about business practices through the companys whistle-blowing procedure, as well as their already established internal reporting process.

Table 2: Data from Tullow Oil Annual Report

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Themes Anti-corruption programmes should be made publically available.

Data evidence obtained from report From a close analysis of their annual report, Shell does not seem to have any clearly set out anti-corruption programmes. However they have a Code of Conduct and Shell General Business Principles guideline. The Shell General Business Principles outlines the expectations Shell has for all their subsidiaries when it comes to conducting business. This is made available on Shells website. Global telephone helpline and website for employees to report confidentially and anonymously any breaches to their guidelines. All employees are required to adopt a code of business conduct in accordance to the New York Stock Exchange (NYSE). As part of this the company has internal procedures established that allows employees to raise any concerns. However the report only states that it is for reporting financial, accounting or auditing concerns. Shell has a Corporate and Social Responsibility Committee who meet five times a year to review the policy and performance of the companys subsidiaries in accordance to the Business Principles and Code of Conduct. The committee also reviews any on-going public concerns and makes recommendations to management. CSR Committee also visits different locations of operation, meeting with staff and external stakeholders to monitor how social, environmental, health and safety and security standards are being put into practice.

Companies should publish exhaustive lists of their subsidiaries, affiliates, joint ventures and other related entities.

Shell produces a list of the different business segments they operate in, including details of the operations and activities.

Shell operates in over 80 countries; information is also provided for over 40 countries of operation, detailing production levels, the percent of interest Shell has in the subsidiaries and developments over the past year. A list is made available of Shells entities in their upstream and downstream segments, the countries of incorporation and shells percentage interest. Revenue and income information is provided for Shells equity-accounted

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investments, dating three years back. Companies should publish individual financial accounts for each country of operations. Shell publishes Consolidated Financial Statements for all its subsidiaries, consisting of consolidated income statement, balance sheet, changes in equity, cash flows and notes. They report in compliance with the International Financial Reporting Standards (IFRSs). Shell reports the financial statements for its parent company separately. Financial reports are also produced for different business segments. The operations are split into upstream, downstream and corporate. However full reports are not provided, but at summarized income information and net capital investments. Shell reports some revenue information according to different geographical locations. The company plans to report separate financial statements by 2013, as required by the International Accounting Standards. All financial information is provided in one currency only; the dollar.

Companies should indicate that facilitated payments are prohibited, and should report on monitoring procedures.

The report states that no donations were made to any organizations are parties throughout the year. However there are no indications on in the report that explicitly prohibits facilitated payments or monitoring procedures to ensure it does not happen. In contrast, Shell has a Shell Oil Company Employees Political Awareness Committee (SEPAC), which is a political action committee that allows eligible employees to make voluntary contributions.

Table 3: Data from Shells Annual Report

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Thematic Analysis of Shell and Tullow Oil

Theme 1: Anti-corruption programmes should be made publically available The details of this theme were provided earlier in the data collection section, and it included further explanations of what it entailed. For this theme, the narrative disclosures of the two companies were read and evaluated numerous times, with the intention of finding any reported evidence of measures put in place by the companies to identify unethical dealings effectively. The theme does not specify exactly what type of anti-corruption programmes companies ought to have, and how they should implement them. As identified in the literature review, multinational companies tend to face political and administrative corruption, commonly in the form of bribery and kickback payments. With this knowledge, it would be reasonable to expect both Tullow Oil and Shell to have anti-corruption programmes that tackles at least these two problem areas.

Tullow Oil reports quite extensively on their anti-corruption programmes, more so than Shell. The company outlines their policies on gifts and hospitality and facilitated payments (kickback payments) and also provides an awareness programme for their employees into bribery. Tullow Oil shows that they recognise the exposure they have to corruption in developing countries and therefore takes measures to ensure their staff and affiliates are aware of their anti-bribery policy. The company goes beyond efforts to avoid bribery and kickback payments by having in place other measures that could potential lead to unethical behaviour; for example their conflict of interest declaration form and their membership in Transparency Internationals Corporate Supporters Forum and EITI. Shells annual report does not explicitly inform its readers of its anti-corruption programmes, particularly those that deal with bribery and kickback payments. The company has a Code of Conduct and a General Business Principles guideline which is not made available in their annual reports, but is referenced as provided on their corporate website. The existence of a Corporate and Social Responsibility Committee who visit and assess the companys subsidiaries through the year could perhaps be viewed as anti-corruption efforts. The committee is responsible for reviewing and monitoring social aspects of Shells entities, but no reference is made as to whether corruption is included. Throughout the report Shell references the availability of further 40

information in other published documents however the boundaries of this research is limited to only their annual reports. The analysis of Shells anti-corruption programme is therefore inconclusive although ideally it should also been presented, seeing as their annual report is the main report stakeholders and investors will refer to.

The need for companies to have effective anti-corruption efforts as part of their policies and strategic goals has been expressed by other researchers in this field. The most closely related is the study by Rose-Ackerman which emphasizes the importance of firms actively making efforts to avoid any involvements in corruption. Bowen (1993) supported the claims made by RoseAckerman by stating that firms should pursue policies and follow lines of action that will benefit society. There is a clear link between the existence of anti-corruption policies in a company and the value they place on the communities they operate in. The effort a company makes is an indication of how much they anticipate corruption as a problem, and the level of responsibility they place on themselves. Donaldsons (1989) theory of the existence of a hypothetical social contract between firms and society can also be used in support of the necessity of firms having adequate anti-corruption strategies. This social contract places a moral obligation and social responsibility on a firm to incorporate effective measures of corruption prevention. Mauro (1995) carried out a country analysis and concluded there is a negative relationship between the GDP growth of a country and its corruption level. Boatrights (2000) more recent study provides further support of the importance of anti-corruption measures; a corrupt economy does not provide a platform of a fair and efficient market needed for economic development. Jacobs Svenssons empirical study on Ugandan firms found that the rate at which a firm grows is negatively affected by its involvement in corruption. More specifically he found that a percentage increase in the bribery rate led to a more than three percent re duction in a firms growth. A similar study undertaken by Shleifer and Vishny (1993) found that corruption is more damaging to firms than taxation because of the high transaction costs they generate. This further emphasizes the need for Shell and Tullow Oil to have adequate anti-corruption measures in place, as to not incur such losses. This is particularly important because one of the principle objectives of a firm is to be as profitable as possible and satisfy shareholders expectations.

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Theme 2: Companies should publish exhaustive lists of their subsidiaries, affiliates, joint ventures and other related entities. One of the main reasons why multinational companies should provide details of their related entities and not just fully owned subsidiaries is so that they are not excluded from public knowledge and scrutiny. For this particular theme, it would be impossible to know whether either company is fully transparent with the number of joint ventures, subsidiaries and all other affiliates, without divulging into further research outside the data sources. What was significant here was to assess how detailed the information published of the entities are, and to what extent the companies reveal their involvement. Organisational transparency is important especially when it comes to multinational companies like Shell and Tullow Oil because it is the only way the companies financial flows can be assessed by potential stakeholders and shareholders.

Tullow oil does provide information on the 22 countries they have operations in, including the number of licenses that have been given in each country. However the report does not disclose the names of the affiliates, neither does it give accounts of the operations carried out by the licensees. Although Tullow Oil is not required by law to report at this level of detail, doing so could be beneficial both to the company and the host nations in the long run. Over 75% of the companys licenses are held in developing economies where they are more likely to be subjected to corruption. The majority of the companys employees are therefore also locals from the communities they conduct business in.

Shell appears to present more information on their business entities in comparison to Tullow Oil. Even though they operate in over 80 countries, Shell gives details for over 40 of those countries. The company is quite informative on the types of production and business activities conducted in the countries. A list of their major joint ventures, including Shells interest expressed in a percentage form is also given.

Many of the studies that have been analysed in the literature review can be used to explain the relevance of companies being transparent with any businesses they are involved in. F. T. Knickerbockers study of the strategic behaviour of multinational companies finds that there is interdependency amongst firms especially in oligopolistic industries. This causes firms to imitate 42

each other, adopting similar strategies and business practices in order to be competitive. Multinational companies are therefore responsible for setting a standard for their competitors to follow, one of which should be transparency in the businesses they are associated with. This can help to eliminate unethical dealings in the economy because companies that seek to protect their reputation and maintain public integrity will be placed in a position where they have to be as transparent as their competitors. Transparency Internationals International Bribe Payers Index found that domestic firms are more likely to bribe than foreign companies. These domestic firms could be in the form of joint ventures or licenses provided by multinational companies. In the case of Shell and Tullow Oil both of whom are heavily engaged in business operations in developing countries, this fact should be even more of an incentive to publish a list of all their operations. These countries are more often the ones that are most vulnerable to the effects of corruption, and tend to be the ones that are excluded from the list a companys holdings. As part of their corporate responsibility to society, and according to studies by Visser et al (2007) companies should make contributions to improving the governance, social, ethical conditions of the developing countries in which they operate. Transparency can be seen as an active contribution in achieving the aims outlined because it can improve the business conditions of developing countries and in turn attract more entrepreneurs and foreign direct investments.

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Theme 3: Companies should publish individual financial accounts for each country of operations. This theme is significant and particularly necessary for companies operating in multiple jurisdictions; host nations citizens deserve the right to be able to assess the activities of companies that have business dealings in their environment. Although Shell and Tullow Oil are not required by accounting standards to report extensively on the financial accounts of all their operations, this research is looking for evidence of as much provision as possible, as part of the companies moral obligation to the nations they have invested in.

Tullow Oil publishes both group financial statements and segmental reports based on the various geographical locations they have operations in. The group financial statements present detailed income statements, balance sheets, cash flow statements and changes in equity. Whereas the segmental reports are not provided in as much detail but rather details the companys revenue, profit, and asset and liabilities account for each segment.

Similarly Shell publishes consolidated financial statements for all its subsidiaries, and both companies are in compliance with the International Financial Reporting Standards (IFRS). They are not required to report in anymore detail, especially not country by country financial accounts. In contrast, Shell does provide financial statements for its parent company separately and also makes claims of its plans to report individual financial statements by 2013. From analysing their statements, there appears to not be much variation between the methods used by either company; the main difference is in the way their segments are organized. Shells segments are split according to the type of operations carried out, whereas Tullow Oil does so purely on geographical locations.

These findings are consistent with the report released on Promoting Revenue Transparency (2011), it found that oil and gas companies reveal very little data on their operations in host nations, and there is significant room for improvement. A companys decision to disclose the financial accounts of their subsidiaries is not only important for monitoring their cash flows and profits, but it also allows the citizens of host nations to know if their governments have entered any arrangements with the company. . Transparency can increase the likelihood of corrupt acts being detected. In relation to the oil industry, the more transparent the cost structure of the oil 44

company is the harder it is for officials to misrepresent information, with a higher chance of being caught (Kolstad and Wiig, 2009). Business contribute to the host nations public budget through taxation, however some governments particularly in developing economies set up taxation incentives to encourage new businesses, all of which needs to be made transparent to the public in order for these deals to be monitored. Rose-Ackermans study showed that in some economies public officials have set up well organized corruption systems where bribes are an acceptable method of doing business. Also, according to the findings from the Global Competitiveness Report 2010-2011, companies are highly likely to succumb to pressures of paying bribes when operating in Brazil. Shell has one of its subsidiaries situated in Brazil; the theory and findings from the studies mentioned above implies that Shell may encounter such problems particularly with negotiating contracts with host governments. This makes their disclosure of financial statements even more necessary, firstly to prove to the host citizens of their honesty and integrity in business dealings and to the international public.

Marrewijk (2003) presented an overview of what corporate social responsibility has been defined as over the years; he states that it is a more human, ethical and transparent way of doing business. This definition supports the emphasis Transparency International has put on the significance of transparency in corporate reporting; part of this transparency being full disclosure of financial accounts. The results obtained from this theme supports Transparency Internationals 2011 Promoting Revenue Transparency report, which found that a dozen oil and gas companies out of 44 reveal little or no information about their operations outside their home country.

Although corrupt acts could be deterred by companies making their financial reports publically available to the citizens of host nations, the effectiveness of this has been challenged by previous studies. For example Lindsted and Naurin (2010) found that simply making information available is not a good prevention mechanism of corruption if other factors such as media circulation and free and fair elections are weak. They also discussed the importance of the publicity condition and the accountability condition in making transparency effective. Even if Tullow Oil and Shell published exhaustive list of all their financial statements, this is only a useful anti-corruption measure if guilty parties can be punished for their actions.

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Theme 4: Companies should indicate that facilitated payments are prohibited, and should report on monitoring procedures. One of the main findings by Transparency International that was of significant concern was the fact that many of the companies they studied did not explicitly state that facilitated payments were prohibited in their reports. Multinational companies high have exposure to facilitated payment risk particularly those that operate in developing nations, and the fact that this is not greatly addressed in their reports is something that needs addressing. For the purpose of this research, the annual reports of Tullow Oil and Shell were thoroughly examined to note whether they make any reference to the prohibition of facilitated payments, and any measures in place to prevent and detect this risk.

Tullow Oil does not make any indication that facilitated payments are prohibited in their report, the company does however does have policies on gifts and hospitality. The report addresses the fact that facilitated payments is an issue in the developing countries they operate in and provides guidance to employees on how to deal with it. Staff is encouraged to conduct themselves in an ethical manner, and comply with the companys codes of conduct. The seriousn ess of the matter according to Transparency International does appear to be recognised because the company provides guidance to its employees on avoiding facilitated payments.

Similarly, Shell does not explicitly state the prohibition of facilitated payments in their company, even though the report refers to the fact that no donations were made to any organizations or parties in that year. There is little indication of any monitoring procedures that have been established to prevent facilitated payments by staff; this may be a sign that the company does not consider this to be a big problem for them, or it is overlooked generally. It is quite possible that facilitated payments is grouped in the same category as bribery and other corrupt acts, and so no isolated reference is made to it.

Shell and Tullow Oil are likely to have frequent contact with the governments in their countries of operations due to the nature of their business, and may need to negotiate approvals of some of their ventures. This makes them both highly exposed to facilitated payment risk and may be faced with pressures to adhere to demands in order to satisfy shareholders profit expectations. 46

The residual control theory suggested by Foss (1999) can be used to predict how vulnerable Shell and Tullow Oil are to this risk. The theory states that the behavior of a firm depends on who owns the residual rights to control the firms assets; whether it is in the control of the host government or the firm itself. There is interdependency between the two companies and the host nations they operate in, which can lead to shared residual rights. The companies are limited in their choice of countries they can establish subsidiaries in because they are mainly involved in oil and gas explorations. The host nations also stand to gain a lot monetarily through taxations, creation of jobs and attraction of further foreign direct investments. This relationship can reduce the companies vulnerability to corruption.

A study by Lui (1985) challenges the recommendation made by Transparency International that facilitated payments should be prohibited by companies internally. Lui puts forward the view that facilitated payments help to allocate resources such as government contracts in a more efficient way. Firms who are monetarily able can make payments in order to prevent less competent firms from attaining the contracts. Pastin (1986) analysed the case involving Lockheed Aircraft Company, who engaged in corrupt dealings to obtain a government contract. In his analysis Pastin concluded that the benefits realized from the deal outweighed the cost of the corrupt deal, especially as no one was made worse off. These views provide divergent views to the disadvantages of facilitated payments.

Supporting Data- News Articles

Article 1: Tullow Oil The Telegraph newspaper (www.telegraph.co.uk) published an internet report in 2012 on the issues encountered by Tullow Oil in their Ugandan operations. Tullow Oil faced accusations from Ugandan authorities that they tried to bribe the prime minister and other government officials in an attempt to gain access to some of the countrys resources. The report detailed the efforts made by Tullow Oil to disprove the accusations; the company released a large collection of correspondence between it and the Metropolitan Police as well as the Serious Fraud Office (SFO), showing the invalidity of the bribery claims. Tullow Oil conducted its own internal 47

investigation, and concluded the accusatory documents were indeed forged; this conclusion was supported by other law enforcement agencies.

Article 2: Royal Dutch Shell BBC news (www.news.bbc.co.uk) published a report in 2004 about Shells activities in Nigeria. The article made claims that Shell admitted to indirectly fueling conflict, poverty and corruption through its operations in Nigeria. Shell launched an independent investigation in 2003 to help the company understand how their presence in Nigeria is contributing to the countrys issues. Shell however refused to publish the findings of the independent report. A spokesperson from the company did however comment that the report highlighted how the company can sometimes add to the existing conflict by the way contracts are awarded, how they gain access to land and deal with representatives from the community. The spokesperson also emphasized that Shell does not tolerate corruption and had dismissed some of their staff for corrupt practices. Another report published by Aljazeera news (www.aljazeera.com) detailed that Shell spent 383 million dollars over three years, to protect its staff and assets in Nigeria. However most of this money went to the countrys security forces which are described as corrupt. a spokesperson from Shell admitted it was difficult to monitor where funds put into communities development projects goes.

Summary of Chapter
This chapter has helped to create a clearer understanding of the ways in which companies conduct their operations in host countries impacts corruption issues within those countries. It has highlighted the fact that companies do play an important role, and can have a big influence on corruption levels, depending on how willing they are to incorporate effective reporting strategies into their business. In the next chapter, all the findings and analysis conducted in this section will be discussed, with an emphasis on their relevance to both the literature review, and how they related to the research questions of this study.

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Discussion
Introduction
This study examined the effect foreign direct investment has on corruption levels in a country, it particularly aimed to investigate whether multinational companies are encouraging corrupt practices by investing in countries that have poor bureaucracies. The aim was to uncover the importance of transparency in contributing or deterring corrupt acts, with a special focus on two companies. This is based on the theoretical argument that companies who are transparent in their corporate reporting, and take strategic measures to not place themselves in positions where they may behave unethically, are less likely to be encouraging corrupt acts. This chapter will provide interpretations of the results, and more importantly how relates to other theories and studies discussed in the literature review.

The thematic analysis of Tullow Oil and Shell, using the recommendations made by Transparency International showed that companies do have an understanding of the risk of corruption, and understand the significance of having effective anti-corruption programmes in place. From the analysis, it can be deduced that Tullow Oil dedicates effort in addressing the risk of corruption in their international operations. This is evident by the presence of multiple initiatives established to not only prevent corruption risk, but also to monitor it. The company is quite transparent in terms of what they do, and demonstrate their involvement in anti-corruption programmes very effectively in their annual report. Although Shells annual report does provide some details of their internal efforts, the company does not report as extensively as Tullow Oil. Both companies, especially Tullow Oil have anti-corruption programmes that target bribery specifically, more so than any other forms of corruption. This analysis does lead to the conclusion that bribery may be the most common form of corruption companies have to deal with when it comes to liaising with government officials. It is further validated by the findings of the 2002 Index Economic Freedom report; which found that companies in economies like Brazil often encounter requests for bribes in securing government procurement contracts, and to facilitate business processes. Rose-Ackermans (2002) research into corruption and the ethics of global business found that in some cases managers claim that public officials have set up a well organized corrupt system, where bribes are an acceptable method of doing business. 49

Transparency
Organisations such as Transparency International and EITI have emphasized the role transparency in corporate reporting has as a deterrent to corruption. It has the ability to encourage ethical conduct amongst employees, partners and other relevant affiliates. The 2011 report on Promoting Revenue Transparency, also conducted by Transparency International also found that oil and gas companies reveal very little data on their operations in host nations, and there is significant room for improvement. This was quite evident from the analysis on Tullow Oil and Shell; both of these companies appeared to not report extensively on the foreign subsidiaries, and failed to comply with this recommendation made by Transparency International. Although they produced consolidated financial reports for all their subsidiaries, they did not public individual statements for each country of operation. The study by Stiglitz (2000) found that transparency plays an important part in avoiding market failure and improving efficiencies in resource allocation. This finding is also consistent with those of Kolstad and Wiigs (2009) research into transparency; in relation to the oil industry, the more transparent the cost structure of the oil company is the harder it is for officials to misrepresent information, with a higher chance of being caught. When companies fail to be fully transparent in the disclosure of financial records and business operations, it creates opportunities for corrupt officials to misuse income from taxation and company contributions without being punished. It also covers up any discrepancies within the companies, particularly those committed by senior management in an effort to maximize profit margins. Baumhart (1961) in this study reported the statistic that managers would opt for profitable courses of action for their companies interest even if faced with ethical dilemmas. 52% of managers interviewed the same study would hire someone to obtain technological secrets, and 58% would engage in bribe offers in order to win contracts. There are certain conditions that have to be met in order for transparency to be effective in deterring corrupt behaviours, as identified by Lindsted and Naurin (2010). The information released has to reach the public; this is known as the publicity condition. Secondly the public need to have some sanctioning mechanisms in order to influence the behaviour of corrupt government officials; this is the accountability condition.

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Companies who fail to publish detailed information of all their entities especially in developing countries could be contributing to the problem, either as a result of them engaging in corrupt practices themselves or enabling officials to misuse funds. This being said, it is important to also address the limitations of transparency in corporate reporting as an indication of a companys defence against corruption. A company being transparent in their reporting may not be a reliable indicator of good behaviour, because reporting and compliance are not the same. A conclusion can be made that although Tullow Oil and Shell do not report in as much detail as suggested by Transparency International, this may not necessarily encourage corrupt practices, and is no representation of their commitment to being ethical. However transparency in reporting can aid in promoting good behaviour, and is a sign that a company that publishes individual accounts of subsidiaries even though they are not legally required to do so, has nothing to hide.

Facilitated Payments
A transparency measure that does seem to be a relevant factor in discouraging corruption is a companys policy on facilitated payments. These can be payments made to government officials and other decision makers in order to speed up business processes or to win lucrative payments. Transparency International recommends that companies should prohibit these payments and report on monitoring procedures that ensure it does not take place. A recent legislation passed by the US Securities and Exchange Commission (SEC) requires oil and gas mining companies that are listed on the US Stock Exchanges to disclose details of any payments made to foreign governments. This will allow citizens of these countries to know exactly how much money is flowing into their economy that should contribute to public spending, and it will also make companies accountable for the purpose of these payments. Tullow Oil meets the expectations of this recommendation; not only do they have well established monitoring procedures; they also publish guidance and expectations for staff to conduct themselves in an ethical manner. Shell on the other hand, does not exhibit the same attention and commitment to avoiding facilitated payments. The theory of residual rights proposed by Grossman and Hart (1986) and Hart and Moore (1990) may provide further relevant insights into the findings. This theory states that politicians and 51

governments of a country have a certain level of control over residual rights and are therefore able to impose rules and regulations on firms, in their favour. Although property rights should be owned by firms wholly some governments still maintain power over these rights, thus affecting a firms vulnerability and exposure in that host nation. In the industry that Tullow Oil and Shell belong to, they are likely to come into contact with government officials frequently particularly when trying to obtain permission for some of their operations to take place. Their exposure and vulnerability in some countries can be high because of the importance of winning contracts and setting up business. This creates more of an a need to discourage facilitated payments and monitoring procedures that ensures managers and other decision makers do not succumb to the pressure by making illegal payments.

Corruption is two sided and requires the corporation of both government officials and multinational companies in reducing it. The efforts made by the two companies used in this study do provide assurance that they are taking measures to not encourage unethical behaviour, even though one does so more than the other. The neoclassical theory of a firm states that a firm will seek to maximize its profits as a main objective. This is the main reason why firms exist in the market, and so there are limits to how far they can take their corporate social responsibility. Vogel (2005) acknowledges firms cannot be made by law, to adopt strategies that are unprofitable but beneficial to society. There are clear limitations to CSR; it is voluntary, and so firms only engage in it as far as it makes business sense to do so. Therefore as much as it is essential for multinational companies to report effectively and transparently, government officials have to also establish similar policies to discourage bribe requests and other forms of corrupt transactions.

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Correlation Analysis
The results obtained from the correlation analysis can be used to support the non-reliability of transparency as an indication of a companys dedication to discourage corrupt behaviours. Weak positive relationships were found between country by country reporting and anti-corruption programmes, and also between anti-corruption programmes and organisational transparency. These findings are also consistent with some of the results from the thematic analysis. Tullow Oil according to their annual report has good anti-corruption programmes in place, and fully explains their efforts to eliminate unethical behaviour by their staff and affiliated companies. However they did not appear to be as transparent in their corporate reporting and disclosure of related entities. There is not enough evidence to suggest that because the company scores weakly in transparency, they are encouraging corrupt practices; consideration has to be made to the anticorruption programmes they have established. It can be argued that the effectiveness of their anti-corruption is a fairer and more accurate indication than transparency, because it demonstrates their active efforts and strategies against corruption, and their commitment to countering it.

Supporting Data
The companies used in this study have different internal approaches to dealing with the issue of corruption. Tullow Oil appears to place higher importance on having adequate anti-corruption programmes and avoidance mechanisms for facilitated payments, rather than disclosing operational and financial information of all their related entities. Shell does not exhibit the same outlook, which is evident from their failure the address the issue of facilitated payments in their annual report, and disclose as much information on anti-corruption programmes. The two individual news articles published on both companies does seem to validate the findings of the company study. When Tullow Oil was accused of bribing government officials in Uganda, the company was able to dispute the claims successfully by releasing detailed information of all their interaction with the Ugandan government, and undertaking their own independent investigation. Shell was directly accused and admitted to fueling corruption in Nigeria through its oil activities in the country. Although the company also carried out independent investigations to understanding their contribution to the corruption levels, they failed to publish the findings of the report. The company is reported to have spent excessively in injecting funds into the 53

countrys security forces that have been described as corrupt. However a spokesperson from Shell admitted it was difficult to monitor where funds put into communities development projects goes. Tullow Oil actions demonstrate their commitment to maintaining a good public image, and efforts in assuring they do not conform to bribery acts. They were able to disclose the findings from the investigations whereas Shell wasnt. Shells failure to account for where community funding go, shows the ineffectiveness of their monitoring procedures. This could be viewed as encouraging the already existing problem of corruption.

Past researchers have focused on effects of transparency on FDI (Drabek and Payne (2001); this paper focuses on transparency within economic policy making and in the activities of government institutions. They argue that this type of transparency is vital in attracting foreign direct investment. This paper has acknowledged the fact that transparency can have an effect on the level of investment a country receives, however it presents a different angle by addressing the issue of transparency in corporate reporting, particularly the financial disclosure of companies annual reports. It also draws on the significance of transparency in the reporting of anticorruption programmes as a monitoring device for companies behaviours and commitment to conducting business ethically.

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Conclusion
Corruption has been an endemic problem that has crippled many economies all over the world, particularly those in developing countries. Many researchers recognise the detrimental effects corruption can have on the citizens of nations, which has led to widespread research into the causes and consequences of corruption. This research paper has explored the relationship between corruption and foreign direct investment by specifically looking into how the behaviours of multinational companies can affect corruption levels in host countries. The different contributors to corruption have been explored throughout the literature review, which led to the focal point of this study; the link between transparency in multinational companies and its effect on corruption. Carrying out a study on Tullow Oil and Shell explored the different ways companies deal with the issue of corruption and their different approaches to managing it in their corporate reporting. Although the recommendations made by Transparency International of what should be included in the reports hold a certain level of reliability, the results of the study showed that companies choose to address corruption in different ways. Transparency International has stressed on the importance of transparency in corporate disclosure. However it is evident from Transparency Internationals analysis of 105 companies that not many multinational companies incorporate this in their reporting. The analysis on Tullow Oil and Shell also led to this same conclusion. To better understand these findings, this study aimed to explore the relevance of transparency in the fight against corruption; and whether a company who isnt as transparent as recommended by Transparency International could be subconsciously encouraging corrupt practices.

Foreign direct investment benefits host economies in many ways; it can lead to the creation of jobs, increased income for citizens, it can also be an incentive for entrepreneurs to establish business operations and attract more foreign direct investments. Overall this enhances the competitive market of an economy, and can improve the quality of goods and services available. In order to address the research question, it is important to understand what actions could potential encourage corruption. It is not enough to assume that the mere presence of multinational companies in corrupt nations is encouraging these acts; it is more essential to analyse how different actions could lead to this assumption. For example Tullow Oil does not publish an exhaustive list of all their related entities and operations, against the recommendation 55

made by Transparency International. However the company has effective anti-corruption programmes that work to prevent, monitor and discourage corrupt practices by their staff. Shell is as transparent as Tullow Oil in their disclosure of related entities, but does not have as many anti-corruption measures in place in comparison. This analysis, combined with the evidence from the news articles published about both companies suggests that transparency may not be as significant a factor in encouraging corrupt acts. It may be more important to look at the strategic actions companies make, and how much investment they have put into generating effective anticorruption programmes.

To conclude:
1. Multinational companies should not be held responsible for encouraging corrupt practices by investing in countries with poor governance; they can only be held accountable for how they behave whilst operating in these countries, and how committed they are in helping to eliminate corruption in these nations. Effective establishment, monitoring, and reporting on anti-corruption programmes can be reliable indicators of whether their operations in some countries are encouraging corrupt acts. 2. Multinational companies should adopt effective anti-corruption policies internally as part of their corporate social responsibility to host nations, and as their moral obligation to helping eradicate the problem of corruption. 3. Host governments have a higher responsibility to refrain from engaging in corrupt transactions, and should also be pressured to establish effective anti-corruption programmes that not only deters unethical companies, but rent-seeking officials from abusing their power. Even if multinational companies satisfy the publicity condition by disclosing financial data of subsidiaries and making the information available, the accountability condition has to also be met in order for transparency to have the desired effect of deterring corrupt acts. The public must have enough power to make government officials accountable for their actions. 4. Transparency in corporate reporting is not a reliable enough reflection of a companys efforts; because reporting and compliance are not the same. It needs to be combined with other factors such as adequate anti-corruption programmes, and active measures to show that they are not adding to the problem but are helping to discourage it. 56

Limitations to research
There are some limitations to this study that may have compromised the reliability of the findings. Firstly, the analysis was carried out on only two companies from one particular industry. Corruption affects different industries in diverse ways; therefore the results cannot be applied to other industries because of the difference in operations, standards and requirements. An analysis on more companies across different markets may have produced different results; however this would not have necessarily led to more accurate findings.

Secondly the data selected for the analysis was limited to only the annual reports of Tullow Oil and Shell. Both companies produce other reports that may have contained more information that relate to the issue of corruption. However, annual reports should contain substantial enough detail for stakeholders, shareholders and independent parties to gain a fair perspective of a companys operations, especially their overview on social matters. The study gears towards corrupt acts between government officials and multinational companies. It may have been insightful to focus on other avenues of corruption, for example between multinational companies and domestically owned companies, to gain a better understanding of how that also contributes to the issues of corruption as a whole.

The recommendations made by Transparency International were the focal point in the thematic analysis. Although this organization is world renowned for the reliability of their research, there are other non-governmental organisations such of World Trade Organisation (WTO) and United Nations (UN) who also produce data based on corruption. Considerations could have been given to the recommendations made by these organizations and their research incorporated into this study.

If further research were to be conducted based on what has been addressed in this study, it may be interesting to actually assess different anti-corruption programmes that can be employed by companies. The effectiveness of the various methods can be analysed to understand the results they produce, and whether in fact they do prevent corrupt acts.

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