Seeds of Corruption? The Contingent Role of Ties to Politicians and Foreign Subsidiary Relations with Government-Sponsored Financial Institutions

Abstract

In drawing from transaction cost economics and social network theories, this study examines the influence of corruption as a determinant of foreign subsidiary formal contracting practices with government-sponsored financial institutions. We hypothesize that lower corruption distance (between parent home and host countries) and higher perceived corruption (in host country) are positively related, and mutually reinforcing, when considering a foreign subsidiary's propensity to formally contract with government-sponsored financial institutions. We also suggest that these relationships strengthen with the intensification of political ties to government officials who can offer preferential political services via contractual agreements, changing the nature of market transactions in favour of a foreign subsidiary. We found support for our hypotheses using data from a sample of over 350 subsidiaries located in the Philippines and Thailand.