Corruption, the digital sectors, and the profitability of foreign subsidiaries in emerging markets

Abstract

Utilising institutional theory, we reconsider the relationship between foreign subsidiary profitability and host country corruption, and offer two key insights. First, when corruption is at a medium level, the profitability of foreign subsidiaries is strongly negatively affected, consistent with prospect theory. However, when corruption is widespread and becomes an uncertainty-reducing norm, subsidiary profitability becomes relatively stronger, albeit remaining at a lower level than in a corruption-free environment. Second, extensive business restrictions weaken the relationship between corruption and foreign subsidiary profitability. Furthermore, foreign companies operating in digital sectors are less affected both by host country corruption and by business restrictions. In addition, we consider lobbying to be an alternative non-market strategy to bribery, which can reduce the negative impact of business restrictions for companies in digital sectors. Our hypotheses have been supported by estimations drawing on over 18,000 foreign subsidiaries in emerging markets.