RIETI Report November 2020

FCPA and Market Quality in Emerging Economies

In this paper Krishnendu Ghosh DASTIDAR and RIETI Chairman Makoto YANO tried to explore the overall effects of FCPA in a corruption-ridden emerging economy, where only the U.S. firm is subject to FCPA regulations. They demonstrate the following; (i) While an increase in fines under FCPA reduces overall corruption, it leads to a deterioration in the market quality in an emerging economy. (ii) If the products are substitutes (complements), overall corruption increases (decreases) and market quality in the emerging economy improves (deteriorates) with stricter enforcement of FCPA. (iii) An increase in the U.S. firm's technological advantage unambiguously leads to a decrease in the market quality.

This month's featured article

FCPA and Market Quality in Emerging Economies

Krishnendu Ghosh DASTIDARJawaharlal Nehru University

YANO MakotoChairman, RIETI

In emerging economies, transitioning from a traditional economy to a modern market economy, many economic impediments have existed since the pre-modern days. Examples are state-sanctioned monopolies and entry restrictions. These countries traditionally had incompetent and corrupt bureaucracies, which required businesses to deal with enormous amounts of red tape. In such economies, "political contributions," more negatively put, "bribes" often effective tools to reduce economic impediments.

Even today, this feature exists and doing any kind of business without bribery in these countries is extremely diffiult and this poses a significant legal and economic risk for corporations operating in these countries. The Foreign Corrupt Practices Act (FCPA) is an American act enacted in 1977 to curb such practices. It tries to prevent corrupt payments to foreign government officials and others considered to be ‘instrumentalities of a foreign government.’ FCPA applies to US companies and institutions, as well as foreign companies, institutions or persons with a nexus to the United States, and their affiliates.

However, in an emerging economy, laws such as the FCPA could delay the removal of remaining economic impediments, thereby preserving economic inefficiency and unfairness. In this paper, we study this aspect of foreign anti-corruption policy from the viewpoint of market quality theory, under which market quality is defined as a measure for efficiency in allocation and fairness in trading.

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