Unsolicited Justice: the Institutional Externality of FCPA Enforcement on Corruption and Investment

Abstract

This paper examines the impact of transnational ant-corruption legal regimes, represented by the U.S. Foreign Corrupt Practices Act (FCPA), on firms’ behavior and performance. I argue that external anti-bribery enforcement disrupts the informal quid pro quo in corrupt countries where firms offer bribes in exchange for market access and protection from expropriation. As a result of the legal intervention, firms subject to FCPA regulation are deterred from navigating predatory regulations using illegal means, and their investment performance suffers. Therefore, such companies decrease investments in markets with burdensome regulatory restrictions enforced by unconstrained government bureaucrats. Using an original dataset on the enforcement actions of the FCPA, I examine the law’s impact on multinational enterprises under its jurisdiction. I find that FCPA enforcement decreases the revenues and profitability of firms listed in U.S. stock markets, and the reductions are mostly found in high-barrier industries within countries lacking strong legal institutions. Results also show that FCPA intervention makes firms tied to U.S. markets more likely to sell fixed assets and reduce both short-and long-term investments in high-risk markets. This paper extends the institution-based view of international business by showing the institutional spillover effects of domestic market regulations. Transnational law enforcement applies a country’s domestic law to foreign jurisdictions, which provides a form of institutional subsidy to countries with weak judicial systems to sanction local corruption.