When Corruption Becomes a Cost of Doing Business

When Corruption Becomes a Cost of Doing Business

Dr. George Monray on his international study of 172 countries and the relationship between corruption and the ease of doing business

For a company deciding where to invest, manufacture or expand internationally, a country is more than a market.

It is also an institutional environment.

The quality of public administration, transparency, regulation and the ease with which companies can establish and operate a business can determine how much time, money and risk a company must absorb before it can compete.

In 2012, George Monray—then publishing as Jorge Mongay—and Diana A. Filipescu examined this issue in Are Corruption and the Ease of Doing Business Correlated? An Analysis of 172 Nations, published by Palgrave Macmillan as part of the Academy of International Business volume International Business: New Challenges, New Forms, New Perspectives.

The study began with a deceptively simple question:

Is there a relationship between a country's level of corruption and the ease with which companies can do business there?

The authors analyzed 172 nations using the Corruption Perceptions Index and Doing Business indicators and applied Pearson correlation analysis.

INTERVIEW

Q: Where did the idea of studying the relationship between corruption and the ease of doing business come from?

G.Monray: From an International Business perspective, both variables are extremely important. When a company evaluates a country for investment, it normally looks at market size, economic growth, costs, talent, infrastructure and political stability. But there is another question that is sometimes less visible: How much does it actually cost to operate within that country's institutional framework? If a company faces complex procedures, bureaucracy, regulatory uncertainty or corrupt practices, those factors can become genuine business costs. We wanted to determine whether there was an observable relationship between these two phenomena at an international level.

Q: Why analyze 172 countries?

G.Monray. Because we wanted to avoid restricting the research to a particular region or group of economies. A broad international sample allows you to examine whether a pattern appears only in particular countries or regions, or whether a broader relationship can be observed. We therefore compared two internationally recognized indicators: corruption perceptions and the ease of doing business.

Q: What exactly do you mean by "ease of doing business"?

G.Monray. It is a way of assessing how easily companies can perform certain activities within a country's regulatory and institutional framework. For an international investor, this is not simply an administrative issue. The time and resources required to establish and operate a business are part of the cost of doing business.

Q: And where does corruption enter the equation?

G.Monray. Corruption can introduce an additional level of uncertainty. A company may know what the official rules are, but if informal payments, favoritism or unpredictable administrative decisions exist in practice, the real cost of operating can be very different from the cost indicated on paper. That increases risk. And when risk increases, the economics of an investment decision can change.

Q: What did your analysis find?

G.Monray. The analysis identified a significant relationship between the two variables. Countries with higher levels of perceived corruption tended to be associated with greater difficulties in doing business, while countries perceived as less corrupt tended to be associated with more favorable business environments. But there is an important qualification. Correlation does not, by itself, establish causation. That distinction is fundamental.

Q: So your research did not demonstrate that corruption directly causes a poorer business environment?

G.Monray. Not in a causal sense. The study identified and measured a statistical relationship between the variables. To establish causality, you would need a more sophisticated research design, potentially including longitudinal data and controls for other factors such as institutional quality, economic development, political stability, education and regulatory structures. Our objective was to identify the relationship, not to claim that we had established a definitive causal mechanism.

Q: Why is that distinction important for executives?

G.Monray. Because executives make decisions using data, but they also need to understand what the data can—and cannot—tell them. If two variables are strongly correlated, that provides an important signal. But it does not necessarily tell us which variable is causing the other. In international strategy, confusing correlation with causation can lead to poor decisions.

Q: What does the research imply for a company considering international expansion?

G.Monray. It suggests that analyzing a country solely in terms of market size can be insufficient. Two countries may have similar market opportunities but very different institutional costs. The real cost of internationalization includes much more than wages, taxes and transportation. It also includes the time required to operate, regulatory predictability, transparency and institutional risk.

Q: Could corruption be described as a kind of "hidden tax"?

G.Monray. As a business metaphor, that can be useful, although I would be careful with the terminology. Corruption can generate costs that do not necessarily appear as a clearly identifiable line item in a company's accounts. It can manifest itself through delays, uncertainty, additional transaction costs, intermediaries, legal risks or difficulties competing on a level playing field. Its economic impact can therefore extend well beyond the value of any individual illicit payment.

Q: How important is this for foreign direct investment?

G.Monray. Very important. A multinational company does not evaluate only how much money it might make in a market. It also evaluates how much uncertainty it must accept to achieve those returns. If the institutional environment is unpredictable, the attractiveness of an investment can change even when the underlying market has substantial potential.

The question is not simply: "How much can I earn?" it is also: "What institutional obstacles and risks will I have to manage to earn it?"

Q: Does corruption affect only large multinational corporations?

G.Monray. No. Smaller companies can actually be particularly vulnerable because they have fewer resources to absorb delays, additional costs and uncertainty. For a multinational, a complicated administrative procedure may be an inconvenience. For an SME attempting to enter a foreign market, it can become a significant barrier to entry. That is why institutional quality matters to companies of all sizes.

Q: Your study was published in 2012. What has changed since then?

G.Monray. International indicators have evolved, institutional environments have changed and the business landscape has become much more data-intensive. Today we also have access to considerably larger datasets and more sophisticated statistical techniques. But the fundamental question remains relevant: How does institutional quality affect the cost of doing business? The methodology can certainly be improved, but the question remains important.

Q: How would you approach the study if you were conducting it today?

G.Monray. I would substantially expand the research design. The original study was essentially cross-sectional: we looked at a large number of countries and examined the relationship between the variables at a particular point in time. Today I would incorporate longitudinal data and panel-data techniques. I would also introduce a broader set of control variables and examine differences across regions and levels of economic development. That would allow the research to move from a primarily correlational question toward a much more sophisticated analysis of mechanisms and potential causality.

Q: What role does country risk play in this framework?

G.Monray. A fundamental one. Country risk should not be reduced to political or financial risk. There is also an institutional dimension. For an international company, an environment in which rules are unpredictable can affect strategic planning, investment, recruitment, financing and asset protection. Institutional conditions should therefore be part of any serious market-entry analysis.

Q: What would you tell a CEO evaluating a new international market?

G.Monray. Don't ask only: "Is this an attractive market?" Also ask: "Is this an environment in which I can operate predictably?" Look at regulation, transparency, corruption, bureaucracy, legal protection, the process of establishing a company and institutional stability. Then combine that information with traditional market variables. A market opportunity is only a genuine business opportunity if the company can actually convert it into sustainable results.

Q: What is the main lesson you would take from the research today?

G.Monray. That the institutional environment is part of business strategy. For a long time, companies have tended to think of a country primarily as a market. But a country is much more than a collection of consumers. It is also a collection of institutions. And those institutions influence the rules under which companies compete.

The research by Monray and Filipescu was published as a chapter in an Academy of International Business volume addressing new challenges and perspectives in International Business. The chapter appears on pages 13–26 and was published by Palgrave Macmillan in 2012.

The study also fits into a broader research trajectory around the relationship between institutional environments, ease of doing business, competitiveness and international strategy.

Viewed from today's perspective, the value of the research is not simply the correlation identified in 2012.

Its broader business lesson is this: When a company evaluates a country, institutions are part of the market.

The strategic question is not simply how much a company can sell in a particular country.

It is also how much it will cost to operate there, how much institutional risk it will have to absorb, and how predictable the rules of the game will be.

This is a retrospective, interview-style reconstruction based on the 2012 research. References to the findings correspond to the original study and should not be interpreted as an updated measurement of the relationship between corruption and the business environment in 2026.