Effects of subnational regional corruption on growth strategies in emerging economies: Evidence from Russian domestic and international M&A activity

Abstract

Research SummaryThis article contributes to an improved understanding of the effects of subnational regional corruption on the external growth strategies of emerging economy firms. We examine the acquisition activity of firms in their home regions, in other parts of the country, and internationally. We consider four mechanisms through which a corrupt regional home context can affect firms’ acquisition behaviors: (a) corrosive deal deterrence, (b) deal facilitation, (c) corruption escape into less corrupt contexts, and (d) enhanced corruption ability to acquire in similarly corrupt environments. Based on an analysis of the acquisition activity of 2,981 Russian firms established in 40 regions in Russia from 2001 to 2008, we find evidence for the existence of both deal facilitating and escaping effects of home region corruption.Managerial SummaryCorruption indicators regularly reveal that emerging countries are more corrupt than developed countries. While prior academic research has associated corruption with predominantly negative effects on business activity, an increasing number of globally successful companies have emerged from such corrupt environments. We advocate a more nuanced view of the effects of corruption on the growth strategies of emerging economy firms. We show that home region corruption can have multiple effects on a firm's geographic expansion. Specifically, we find that corruption in the home region helps regional firms expand their business through acquisitions when it is pervasive and nonarbitrary. At the same time, however, when expanding geographically, firms, on average, seem to prefer to diversify their assets in other regions or countries that are less corrupt.