By Dezan Shira
While both China and India are drawing global investors’ attention with their impressive economic performance, prevalent bureaucratic and political corruption has stood out as a negative factor that unfairly affects foreign enterprises and will potentially stifle economic development in the long term.
Corruption in public procurement creates unfairness in access to resources
According to an anti-corruption briefing series published by the risk analysis company Maplecroft, corruption is still prevalent in both China and India’s public procurement, since this is usually where the governments can easily maximize their gains. Corruption scandals in public procurement that usually involve high-level politicians have caused discrimination in tender selection, and made it more difficult for more qualified foreign companies to access major projects or attend non-discriminatory public bids.
The Maplecroft research identified construction, natural resources, banking and finance, and health care as four sectors that are most exposed to corruption in China. Interestingly, those are also sectors where foreign investors boast comparatively less presence. Despite the multiple possible factors that lead to the different scales of foreign presence across distinct industries, the research result still makes people wonder if certain correlations do exist between corruption and weaker foreign investors’ competitiveness in these particular sectors.
In addition to encountering the same problems as investors in China, foreign companies in India also need to deal with the regional differences in administrative systems and laws across the country. The lack of consistency in the system could greatly inconvenience a business that operates in different states. According to the World Bank’s World Enterprise Survey in 2006, 24 percent of companies in India expect to secure a government contract through bribing, and another report by Transparency International said the average bribe amount is estimated to stand as high as 15 percent of the contract’s value.
Corruption in administrative services adds to company costs and reduces efficiency
Complicated and cumbersome administrative procedures in both countries give governmental officials wider discretionary powers to interpret rules and thus lead to massive corruption in administrative services. Public utilities, such as water, phone and electricity can become more expensive because enterprises are expected to make “facilitation payments” to secure operating contracts and speed up accessing procedures. Bribes also take place in tax and customs administrations, in order to reduce payment and convenience customs clearance.
Corruption in legal system could hurt business essentials
China’s judicial independence is rated at “extreme risk” by the Maplecroft research, and the court can determine rulings in favor of bribers or influential local government bodies and officials. Biased judgments under corruption can impact the essentials of a business, such as contract enforcement and property rights protection.
In India, although the judicial independence is not low, the judicial accountability is still weak, since the political interference in judicial decisions is relatively high, from judge appointment to final judgment deliveries. While the upper court is considered to be comparatively clean, corruption in lower courts is rampant and systematic. Court officials can misuse their power with impunity at multiple points. Court procedures are very slow and complicated, making it harder and costlier for companies to protect their proper rights with legal measures.
Anti-corruption progress
As both governments have realized the potential threat corruption will bring to the economic advancement in the long term, they have been making various attempts to reduce corruption. China has been in pursuit to an anti-corruption drive that concerts the United Nations Convention against Corruption and targets both public and private sectors since 2006. Numerous anti-corruption investigations and prosecutions have taken place and many of them have affected top-level officials.
The Indian government has started drafting the Lokpal Bill, which plans to establish a new independent anti-corruption governmental body. The government plans to introduce the new Bill at the next parliamentary session, which begins in July 2011.
About the Author
Read the rest of this story about potentical corruption when you do business in China or India, was written for the Asia business news blog, 2point6billion.com.
You can also find out more about doing business in China from Asia Briefing’s China Business Guide.
