Does it pay to bribe? The influence of bribery on new venture disbanding in China

Abstract

This research extends bribery research toward entrepreneurial theory and practice by examining how bribery impacts new venture disbanding in China. Existing research suggests that bribery may enhance firms’ competitive advantage; however, building off of resource-based view and taking into consideration the institutional context in China, the current study proposes that firm bribery activity hurts new ventures by increasing the hazard of venture disbanding. Further, guided by resource dependence theory, this study examines how local economic development and organizing activity moderate the relation between bribery and disbanding. In particular, it is proposed that when local economic development is suffering, or when firms are not engaging in appropriate organizing activities, bribery will lead to higher chance of new venture disbanding. Data from Chinese entrepreneurs support these hypotheses.

Keywords

firm bribery activity local economic development new venture disbanding organizing activity

Introduction

Although there is “not a country in the world which does not treat bribery as criminal on its lawbooks” (Noonan, 1984: 702), bribery remains the norm rather than the exception all over the world. According to a survey administered in 95 countries by Transparency International, one person in four has paid a bribe to a public body in 2017 (Transparency International, 2017). The annual amount of bribes paid in the world along with stolen money is estimated to be approximately US$3.6 trillion (World Economic Forum, 2018). Further, bribes are more common in nations where legal and judicial systems are insufficient (Luo, 2005). While bribes can be paid to a variety of entities, the majority of firm bribes are paid to government agencies or officials (Luo, 2005). In keeping with the literature (Martin et al., 2007), firm bribery activity is defined as firms’ engagement in making unofficial payments to public officials for private gain.

The issue of bribery, especially bribery in a global setting, has received wide scholarly attention for more than four decades (Khan et al., 2013). Nonetheless, this research suffers from two major limitations. First, while a growing body of research has examined bribery from the perspectives of both the supply side (bribe payers) and demand side (bribe takers), the supply-side bribery remains underexplored. In examining the supply-side bribery, prior research has primarily investigated the factors that influence firm bribery activity. Yet research on whether or not bribery, particularly from the perspective of the supply-side of bribes, has strategic implications for firms is remarkably scarce. Firms may keenly and purposefully capitalize on bribery as a “strategic choice” (Spencer and Gomez, 2011) to seek unfair advantages and special treatments (Martin et al., 2007). As organizations and societies tend to perceive bribery as beneficial for firm performance, a more nuanced theory of the impact of firm bribery activity is not only critical but timely.

Second, existing research on firm bribery has largely focused on established enterprises operating in a cross-border context (e.g. Lee and Weng, 2013; Martin et al., 2007; Spencer and Gomez, 2011), yet there have been fewer attempts to examine new ventures’ bribery activity. Previous research indicates that factors that account for the ongoing operations of established firms do not explain the creation of new ventures (Baron and Tang, 2009; Gartner et al., 1992). As survival and profitability goals can create heightened pressures for new firms, illicit behaviors such as bribery may become increasingly attractive as strategies for goal achievement. Indeed, research has provided evidence that small, private firms tend to pay more bribes due to weak connections with governments (Wu, 2009). Hence, the current study contends that the strategic implications of firms’ decisions regarding corrupt practices are particularly acute for new ventures due to the challenges inherent in conforming to the environmental pressure to survive.

Propelled by the above two motivations, the current research extends the discussion of bribery toward entrepreneurial theory and practice by examining how bribery impacts new venture disbanding, an important but little explored aspect of business (Delmar and Shane, 2003; Khan et al., 2014). Defined as “the cessation of efforts to develop the new venture” (Delmar and Shane, 2003: 1165), new venture disbanding has significant implications because entrepreneurs often invest tremendous amount of time, effort, and resources in the development of new ventures (Reynolds and Curtin, 2008), yet a large portion of new ventures fail before they become established organizations (Yang and Aldrich, 2012). Building on the resource-based view (Barney, 1991) and on the premise that bribery is a resource-consuming activity that harms firms’ legitimacy, this study proposes that firm bribery increases the hazard of venture disbanding.

Furthermore, in response to the call for more research to uncover the means to regulate the effect of negative organizational behavior (such as bribery) on performance (Pfarrer et al., 2008), this study draws on resource dependence theory to identify the contingencies under which firm bribery activity influences new venture disbanding. According to resource dependence theory, as new organizations lack power and control over critical resources in the external environment, they depend on the environment to gain resources (Pfeffer and Salancik, 1978). The local economic development at time of founding may have both immediate and lasting influence on new venture creation because munificent environments provide new ventures with abundant resources to capitalize on the opportunities in the external environment (Amezcua et al., 2013; Baron and Tang, 2011). Resource dependence theory further posits that as environments are not always dependable, firms engage in various tactics to increase their capability to avoid dependence on the external environment (Pfeffer and Salancik, 1978). The legitimacy process model for new ventures identifies conformance strategy (e.g. engaging in organizing activity to acquire regulative legitimacy) as especially important for new ventures because failure to conform to various regulatory expectations will prevent the new venture from operating legally and limit its access to resources (Zimmerman and Zeitz, 2002). In line with these logics, this research considers local economic development and organizing activity as moderators of the link between bribery activity and new venture disbanding. For the purpose of the study, organizing activity is defined as “activities to establish the organization that will provide the new product or service” (Delmar and Shane, 2003: 1165).

The current study seeks to investigate these research questions by testing the proposed relationships in China, where bribery has been so widespread that the central government emphasized its determination to embark on the anti-corruption campaign fiercely in 2015 (China Daily, 2015). Since then, the Chinese government has initiated various programs to attack corruption through establishing new anticorruption laws, appointing specialized agencies dedicated to corruption reform, and tightening monitoring mechanisms. During Chinese President Xi Jinping’s state visit to the United States in 2015, he reiterated the government’s commitment to expand law enforcement and anti-corruption cooperation with the US government by enhancing coordination and collaboration on criminal investigations, repatriation of fugitives, and asset recovery issues (The White House Office of the Press Secretary, 2015). China has also been considering joining the Organization for Economic Cooperation and Development (OECD) Working Group on Bribery (The White House Office of the Press Secretary, 2015). Although China is not a signatory to the OECD convention yet and the positive impact of these institutional forces is unlikely to accumulate immediately (Anokhin and Schulze, 2009; Tang and Tang, 2016), China’s anti-corruption campaign recovered US$519 million in 1 year in 2018 (NBC News, 2019). By providing a finer-grained investigation of the supply side of bribery in China, this research hopes to shed light on the impact of the efforts to deinstitutionalize endemic corruption in China.

The contributions of the current study are twofold. First, in examining the impact of firm bribery activity on new venture disbanding, rather than the factors that influence bribery in established organizations, the present research provides important insights into the consequences of firm bribery activity in the new venture creation context. Although new ventures are expected to comply with the conventions of conducting businesses (even through corrupt practices), there is a dearth of research on whether firms’ engagement in wrongdoing has any influence on new venture survival. In doing so, this research responded to previous call that has urged investigation on the supply side of corruption (De Jong et al., 2012; Jeong and Weiner, 2012), in contrast to existing research that has primarily focused on the demand side of corruption. Second, the current study integrates resource-based view and resource dependence perspective to theorize and test the influence of bribery activity, organizing activity, and local economic development in jointly shaping venture disbanding. Thus, this research provides an important first step toward identifying the most critical factors and testing how they jointly determine whether bribery activity is ultimately detrimental for new venture survival. This study assumes a firm-centric perspective on bribery, thereby offering a valuable complement to previous work that has often dismissed the importance of firm-level factors for bribery in favor of more macro-level drivers (Martin et al., 2007; Sanyal, 2005; Spencer and Gomez, 2011).

Theory and hypotheses

Demand-side versus supply-side bribery

Prior research has distinguished bribery based on who is supplying as opposed to who is demanding bribes (Cuervo-Cazurra, 2006). Research examining demand-side bribery (i.e. instances where government officials demand money for their own benefits rather than the benefits of the state) has typically focused on the characteristics of countries and institutions as drivers of bribery such as weak and unstable governments (Shleifer and Vishny, 1993), cultural and sociological factors (Getz and Volkema, 2001), effectiveness of legal systems and quality of infrastructure services (Rodriguez et al., 2005), and the rule of law and political legitimacy (Ali and Isse, 2003). This stream of research has also considered the consequences of bribery demand such as the entering of local markets by multi-national enterprises (MNEs) (Uhlenbruck et al., 2006), different types of foreign direct investment (Brouthers et al., 2008), entrepreneurs’ growth aspirations (Estrin et al., 2013), and MNEs’ propensity to cooperate with host country governments as well as their focus on ethical codes and philanthropic contribution (Luo, 2006).

Supply-side bribery (i.e. firm-level bribery activity) involves firms engaging government officials with unofficial payments to achieve organizational purposes such as receiving favorable regulatory decisions and winning contracts. Compared to research on demand-side bribery, research examining supply-side bribery is less developed and has focused on factors that potentially encourage firms to engage in bribery activity such as national culture and perceived financial constraint and competitive intensity (Martin et al., 2007), both formal and informal institutions (Sanyal, 2005; Spencer and Gomez, 2011; Tonoyan et al., 2010), the corruption levels of an MNE’s host country and home country (Spencer and Gomez, 2011), firms’ refusal power and ability to pay (Svensson, 2003), firms’ threat point (i.e. ability to walk away) (Lee et al., 2010), economic rents, firm ownership structure, and quality of judicial systems in the home country (Jeong and Weiner, 2012), top management team characteristics (Collins et al., 2009), and so on.

Nonetheless, there has been little attention accorded to the consequences of supply-side bribery from an entrepreneurial perspective. This deficit in firm-level bribery is troublesome as firms in the new venture creation process encounter tremendous pressure to conform to conventions and expectations, even in the bribery domain (Luo, 2006). To fill this gap, the current research formulates arguments on the integration of bribery and entrepreneurship research and investigate the phenomenon of firms supplying bribes to governmental officials within the context of new venture development. In particular, this study draws on resource-based view (Barney, 1991) to posit that bribery activity will hurt new ventures by increasing the hazard of new venture disbanding.

Firm bribery activity and new venture disbanding

Existing research suggests that bribery is beneficial for firms because it can help firms gain government support and preferential treatment (Lee and Weng, 2013). Drawing upon resource-based view (RBV), however, the current research argues that the detrimental effects of firm bribery activity may outweigh the positive effects, particularly in the context of new venture development. The RBV argues that firms’ endowment with superior resources (i.e. resources that are valuable, rare, inimitable, and nonsubstitutable) contribute to firm performance (Barney, 1991). To gain competitive advantages, firms strive to acquire or develop resources. However, firms also need to ensure that “they do not overinvest in the acquisition or development of such resources, since the suppliers of rare resources may bargain away the value these resources may create in a product market” (Schmidt and Keil, 2013: 206). As bribery entails tremendous amounts of additional business costs for new ventures (Brouthers et al., 2008), new ventures may pass the bribery cost onto consumers by making prices for new products or services higher, which restricts the potential market to those willing to pay for higher prices only and hence reduces the ability of the new venture to penetrate the market (Brouthers et al., 2008). In addition, corrupt transactions are characterized with uncertainty and capriciousness (Uhlenbruck et al., 2006), and the financial incentives, or rent, of bribery may be short term (Jeong and Weiner, 2012). That is, it is possible that government officials who accept bribes do not provide the agreed-upon services and support as predicted. It is also likely that government officials raise the bribing amount for necessary approvals to gain maximal bribes (Uhlenbruck et al., 2006). Under such situations, bribery cost will be unexpectedly high, yet the likelihood that bribery will reap special advantages will be diminished because the nature of bribery activity offers little legal recourse (Uhlenbruck et al., 2006). As new ventures may be concerned with the organizational and legal repercussions of such illicit acts, their motivation to continue the new venture creation process will be lessened, leading to high hazard of venture disbanding.

Furthermore, bribing firms may experience the loss of a valuable, intangible resource for new ventures: legitimacy (Zimmerman and Zeitz, 2002). New ventures are not as accountable and reliable as established organizations because they lack the legitimacy that existing firms enjoy. Viewed as an operational resource, legitimacy is especially critical in the early stages of a new venture’s existence because it provides a means for the new venture to acquire key resources and support from external stakeholders such as quality employees, financial capital, and technology (Zimmerman and Zeitz, 2002). Legitimacy is also critical for new ventures to develop social networks with external stakeholders to survive competition (Delmar and Shane, 2004). Further, as financial performance is practically nonexistent for the early stages of the new venture, venture disbanding depends more on the perceptions of stakeholders and willingness of stakeholders to offer support than on the venture’s actual financial performance (Delmar and Shane, 2004). Failure to demonstrate legitimacy will thus decrease stakeholders’ perception that the new venture is able to operate in the legitimate business environment. In the absence of legitimacy and stakeholders’ support, the hazard of venture disbanding will be increased.

Although indirect, existing research offers some evidence that high firm bribery activity may hamper firms’ development. For instance, a firm’s bribe amounts paid to home country government officials are found to be negatively related to the firm’s exports (Lee and Weng, 2013). Another study examining the consequences of firm bribery found that increasing and excessive bribery may lead to “liabilities of staleness and sameness,” which in turn harms entrepreneurial performance (De Jong et al., 2012: 327). On the basis of the rationales and evidence above:

Hypothesis 1: Firm bribery activity is positively associated with new venture disbanding.

The moderating roles of local economic development and organizing activity

New venture creation is affected by the environment and market conditions (Amezcua et al., 2013). Environmental conditions are particularly less conducive to new ventures because they face multiple challenges of obtaining necessary resources, establishing social networks, and navigating a competitive landscape (Baron and Tang, 2011). These challenges are most visible at a local level because local resources vary greatly by market and geographical space, and they provide differential levels of constraints, access to power, social structures, and opportunities for new ventures (Amezcua et al., 2013). As such, local conditions that may shape the impact of firm bribery warrant investigation. Drawing on the primary premise of resource dependence theory that firms rely on the external environment for the necessary resources for survival and growth (Pfeffer and Salancik, 1978), this study argues that weaker local economic development will fortify the impact of bribery activity on venture disbanding for the following rationales.

When local economic development is strong, better rules and regulations in the market economy are established, which would reduce uncertainty and information asymmetries between organizations and external stakeholders (North, 1990) and hence encourage new ventures to actively engage with critical stakeholders to exchange resources and information. Higher economic development can also enhance the availability of financial capital and promote potential consumption (Tsang and Yip, 2007). As higher purchasing power and capital flow will promise a higher return on investments, they will reduce new ventures’ direct confrontation with environmental threats and liabilities and allow new ventures to focus on opportunity recognition and exploitation. In addition, stronger local economic development can promote labor development and production, sufficient physical or regulatory infrastructure, a well-functioning legal system, anti-bribery activities, and ample provision of fundamental societal needs (Jia, 2014), which will in turn increase economic activities and profitability. Such environments will provide more opportunities for new ventures to acquire resources, to establish networks, and to bring business potential into full play. Under such circumstances, financial and other key resources are not only available but stable and cost-effective, making it easier for new ventures to earn profits from the wealth of local residents. Hence, new ventures’ capabilities to build legitimacy and resources will be enhanced and new ventures may rely less on bribery to gain resources. As a result, they will exert less effort and fewer resources on channeling bribery activities toward effective performance, thus dampening the positive effect of bribery on venture disbanding.

Conversely, when local economic environment is deficient, underdeveloped markets do not provide ample resources (Jia, 2014). As a result, new firms will be discouraged from seeking support and resources from the external environment because it is unclear and uncertain whether such efforts will bring access to critical resources and opportunities. As returns of efforts to start a new venture are risky, new ventures may likely focus their limited resources on bribing government officials for access to resources to continue the startup process. That is, rather than relying on the external environment for success, new firms may be prompted to focus on channeling bribery activities toward effective new venture creation because bribery serves as a more attractive alternative option for them to acquire valuable resources. Thus, it is proposed that low economic development will make the negative effect of bribery on disbanding more pronounced.

Hypothesis 2: Local economic development negatively moderates the relationship between bribery activity and venture disbanding such that the positive effect of bribery activity on venture disbanding is stronger when local economic development is low as opposed to high.

Resource dependence theory further suggests that to reduce their dependence on the external environment, firms strive to seek a variety of strategic actions (Pfeffer and Salancik, 1978). As discussed earlier, when an organization commits a transgressive activity such as bribery, its legitimacy may be severely undermined. Under this context, the legitimacy model for new ventures proposes conformance as the most effective proactive action for new ventures to rebuild legitimacy (Zimmerman and Zeitz, 2002). Conformance as a strategy acquires legitimacy by following the rules and adhering to common norms and beliefs. For instance, a new venture’s organizing activity (e.g. filing articles of incorporation and obtaining professional certification) may help the new venture seek regulative legitimacy (Zimmerman and Zeitz, 2002). In keeping with the logic of the legitimacy process model for new ventures (Zimmerman and Zeitz, 2002) and drawing upon resource dependence theory (Pfeffer and Salancik, 1978), this study proposes that lower organizing activity can reinforce the bribery-disbanding relationship.

Grounded in Weick’s organizing theory (Weick, 1979), firm organizing activity consists of behaviors necessary to create a new business (e.g. purchasing equipment, asking for funding, forming legal entity, etc.; Carter et al., 1996). Referred to as legitimating activities (Delmar and Shane, 2004), these actions signal professionalism and enable new ventures to demonstrate to the business community that they adhere to the norms of legal authority and societal expectations. Further, as organizing activities are visible to others (Carter et al., 1996), they are likely to convince potential stakeholders of the value of the firm’s existence. Hence, they can help enhance the new venture’s legitimacy perceived by the stakeholders and make the emerging organization more like a fully operating organization. Previous research offers strong evidence that decreased organizing activities would lead to disengagement of new venture creation, whereas greater level of intense organizing activities would result in new ventures with sales and positive cash flow (Carter et al., 1996; Gatewood et al., 1995).

In the context of new venture creation, as entrepreneurs deal with multiple demands with their limited attention, engaging in various organizing activities requires that time, energy, and resources be allocated away from other activities (such as bribery) to enable entrepreneurs to focus on venture creation. Committing to various activities necessary to create the new venture may shift firms’ attention from channeling deviance or illegitimate routes toward survival, hence countering the impact of bribery on disbanding. More importantly, engaging in organizing activities will enable new ventures to seek support and obtain the legitimacy necessary to operate like an established organization (Delmar and Shane, 2004). Hence, these strategic actions can create a defense or buffer against corrupt activities and decrease the odds of bribery activity exerting influence on disbanding. This situation may be particularly acute for entrepreneurs whose personal principles and values collide with the engagement in corrupt activities. Thus, to financially survive and ethically thrive, the moral consciousness of these entrepreneurs may encourage them to attach greater importance to legitimate activities in an attempt to counter their wrongdoing they conduct under pressure (Pfarrer et al., 2008). In the absence of organizing activity, however, new ventures may rely more on bribery and shift more of their attention and resources on channeling bribery toward new venture creation because that may be the mechanism that holds promise for new ventures lacking support and networks. As a result, the impact of bribery on venture disbanding will be more pronounced.

Hypothesis 3: Firm organizing activity negatively moderates the relationship between bribery activity and venture disbanding such that the positive effect of bribery activity on venture disbanding is stronger when organizing activity is low as opposed to high.

Method

Sample and data collection

To overcome potential survivorship bias, this study surveyed entrepreneurs in the process of creating a new venture, that is, nascent entrepreneurs (Cassar, 2010; Tang, 2008). These entrepreneurs met the following criteria: (1) “they were in the process of creating a new venture either alone or with others,” (2) “they were expected to have certain ownership in the new venture,” and (3) “the startup has not had a positive monthly cash flow that covers expenses and salaries for more than 3 months” (Cassar, 2010). Three rounds of pretests with entrepreneurs (who were excluded from the main study) were conducted to make sure the measures were appropriate and to enhance the interview protocol. All survey items were translated and back-translated to ensure consistency.

The main study was conducted in eight cities in China: Tianjin, Beijing, Hangzhou, Guangzhou, Chengdu, Xi’an, Shenyang, and Wuhan. These eight cities represent five major regions in China. Following the Panel Study of Entrepreneurial Dynamics (Reynolds and Curtin, 2010), this study selected nascent entrepreneurs via random digital dialing based on the telephone number since the telephone penetration rate was above 75% in all of these eight cities with more than half of them exceeding 90%. A total of 69,990 families were contacted and 20,424 people accepted interviews. Through this process, 974 nascent entrepreneurs were identified. These nascent entrepreneurs met the criteria indicated above.

To increase the response rate and to encourage participation, the following cautions were exercised with the data collection. (1) Face-to-face interviews of the survey questions were conducted with responses recorded during the interviews, which is considered a better strategy than mail surveys because personal contacts are crucial in the business context, particularly in China (Luo, 2006). (2) The entrepreneurs were informed that the survey was designed by the Entrepreneurship Research Center of one of the most prominent universities in China and funded by a Key Research Grant of National Natural Science Foundation of China. Emphasizing academic neutrality may enhance the subjects’ motivation to complete the survey (Welch et al., 2002). (3) The entrepreneurs were assured that only accumulated survey results would be published without exposing the identities of the firm or the entrepreneur. (4) The bribery items were asked at the end of each interview when bond between the interviewer and interviewee had been established (Lee and Weng, 2013).

Two rounds of interviews were administered, so that the dependent variable (venture disbanding) was surveyed 1 year later. Time 1 interviews yielded 321, and time 2 interviews generated 118 complete responses. These 118 entrepreneurs answered surveys at both interviews and provided complete responses to all survey items. No significant difference was found between the final sample and the deleted data based on a series of multivariate analysis of variance tests. Among the final sample of 118 entrepreneurs, approximately 22% were located in Beijing, 17% in Tianjin, 13% in Chengdu, 11% in Guangzhou, 10% in Wuhan, 9% in Shenyang, Xi’an, and Hangzhou respectively.

Measures

Firm bribery activity

Prior research (Martin et al., 2007; Spencer and Gomez, 2011; Uhlenbruck et al., 2006) has provided validation for the bribery measure in the World Business Environment Survey developed by the World Bank. This measure asks respondents to rate the extent to which firms in their line of business “typically need to make extra, unofficial payments to public officials” for six categories of business practices (1 = always true, 6 = never true): (1) “to get licenses or permits to expand or operate the business,” (2) “to deal with the settlement of taxes,” (3) “to gain government contracts,” (4) “to deal with customer services,” (5) “to deal with courts or judges,” and (6) “to deal with law enforcement agencies.” These bribery questions were worded indirectly so that the interviewees would not confess their own bribery activities. However, the data gathered with this measure “should not be interpreted as an indication of how much a given firm actually engaged in bribery” (Spencer and Gomez, 2011: 296) because the indirect phrasing of the items better captures the pervasiveness of bribery (Uhlenbruck et al., 2006) or pressures firms face to engage in wrongdoing (Spencer and Gomez, 2011) in their environment.

Therefore, to gauge supply-side bribery whereby firms induce public officials to misuse their authority to gain advantages, the current research adapted the original measure of bribery by directly asking the respondents to indicate whether or not their firms have actually paid any bribes for the business practices listed above with “1” indicating “yes” and “0” indicating “no.” The responses to these six items were summarized to produce the score for each firm, so that higher values indicated greater bribery activity.

Firm organizing activity

Delmar and Shane’s (2003, 2004) measure was adopted to gauge firm organizing activity. This measure generated a total score to 13 dichotomous questions on steps founders take to organize new businesses. Previous research indicates that these activities can be combined together into an overarching measure (Carter et al., 1996; Gatewood et al., 1995). Specifically, respondents were asked the following questions which were coded as “1” if the answer was “yes” and “0” if the answer was “no:” (1) “Has the venture filed the necessary forms with the tax authorities?” (2) “Has the venture registered with government authorities?” (3) “Has discussion about the product or service the startup will sell been initiated with potential customers?” (4) “Have any raw materials, inventory, supplies, or components for the startup been purchased?” (5) “Have any major items like equipment, facilities, or property been purchased, leased, or rented for the new startup?” (6) “Has the venture sought to obtain a patent, copyright, or trademark?” (7) “Has the venture sought to obtain necessary permits or licenses to operate?” (8) “Has the venture sought to obtain financing?” (9) “Has the venture initiated marketing or promotion efforts?” (10) “Has the venture hired employees (permanent or temporary)?” (11) “Have financial projections been developed?” (12) “Has the venture gathered information about the market and competition?” and (13) “Has a business plan been completed?” Following Delmar and Shane (2003), this study requested information confirming the respondents’ statements (e.g. a copy of business plan) to mitigate the chance that the respondents overstated the activities that they had completed (Khan and Tang, 2017).

Local economic development

Gross domestic product (GDP) per capita has been widely used to measure economic development (Jia, 2014; Tsang and Yip, 2007). Thus, following previous research and editions of China Statistical Yearbook, this study measured local economic development with the GDP per capita in each of the eight cities. Then these GDP values were weighted by 10,000 for PROCESS to produce more meaningful coefficients in our analyses.

New venture disbanding

Following Delmar and Shane (2003, 2004), this research measured new venture disbanding with the following item during time 2 interviews: Have all parties ceased their efforts to create the venture (1 = yes and 0 = otherwise)? Twenty-nine, of the 118 firms in our final sample, disbanded the venture creation efforts.

Control variables

At the individual level, entrepreneurs’ gender (1 = male and 2 = female) was controlled because research has indicated that females are more restrained from unethical practices than males (Weeks et al., 1999). Entrepreneurs’ age was controlled because it has been shown to be relevant in making unethical decisions (Strutton et al., 1997). Entrepreneurs’ education (1 = bachelor degree or above and 0 = otherwise) was controlled because it may affect the firm’s engagement in bribery activities (De Jong et al., 2012). Entrepreneurs’ prior work experience was also controlled (1 = yes and 2 = otherwise) because a large body of literature has documented the influence of entrepreneurs’ human capital in the entrepreneurial process (e.g. Rauch and Rijsdijk, 2013).

At the firm level, the age of the business idea, that is, idea age, was controlled by calculating the total number of years since the idea was conceived. The longer an entrepreneur considers and nurtures an idea, the more likely the idea will turn into a successful business (Chesbrough, 2010). Previous research suggests that research and development (R&D) intensity may be associated with firm bribery (Lee and Weng, 2013). Thus, firms’ R&D was controlled by averaging three items that asked respondents whether venture creation activities included (1) advancing R&D, (2) hiring R&D employees, and (3) focusing on technology-related products and services (with “1” indicating “yes” and “2” indicating “no”). Prior research suggests that target market can affect the approach that a firm deems appropriate to promote its products (Covin and Slevin, 1990). Thus, target market was controlled by asking whether the new product or service was planned for “emerging markets” (1), “developing markets” (2), or “mature markets” (3).

Lastly, previous studies posit that both the institutional environments and industry have a significant impact on corruption (Brouthers et al., 2008; De Jong et al., 2012; Martin et al., 2007; Spencer and Gomez, 2011). Thus, entrepreneurs’ perception of economic development (1 = has improved, 2 = stable/no change, and 3 = has worsened) and the industry of the new venture (1 = manufacturing industry and 0 = others) were also controlled.

Analysis and results

Table 1 presents the means, standard deviations, and Pearson correlations. It also shows the minimum and maximum values of all the variables. All correlations are lower than .40, reducing the concern of potential multicollinearity. Further, no variance inflation factor value is higher than 2, verifying that multicollinearity should not bias our findings.

Table 1.

Means, standard deviations, and correlations.

	1	2	3	4	5	6	7	8	9	10	11	12	13
Mean	0.25	7.86	1.71	6.73	1.49	0.37	1.21	1.19	4.18	2.31	1.52	1.69	0.13
SD	0.43	2.70	1.87	1.36	0.15	0.49	.41	0.39	3.27	0.76	0.50	0.85	0.33
Minimum value	0.00	1.00	0.00	3.83	1.28	0.00	1.00	1.00	2.00	1.00	1.00	1.00	0.00
Maximum value	1.00	13.00	6.00	8.75	1.85	1.00	2.00	2.00	22.00	4.00	2.00	4.00	1.00
1. Disbanding
2. Organizing activity	−0.10
3. Bribery activity	0.11	0.16*
4. Local economic development	0.01	−0.14^†	−0.01
5. Entrepreneur age^a	−0.04	−0.15*	−0.10	−0.09
6. Entrepreneur education	−0.20*	0.14^†	−0.02	−0.09	−0.02
7. Entrepreneur gender	0.14	−0.11	−0.11	−0.04	−0.10	0.13^†
8. Prior work experience	0.18*	−0.16*	0.07	0.04	−0.02	−0.12	0.12
9. Idea age	−0.07	0.12	−0.13^†	−0.09	0.40***	0.06	−0.02	−0.06
10. Target market	0.16^†	−0.20**	0.04	0.01	0.08	−0.04	0.01	0.04	−0.12
11. R&D	0.12	−0.04	0.04	0.01	−0.21**	−0.08	0.16*	−0.02	−0.22**	0.25***
12. Perception of economic institutions	0.07	0.02	0.01	0.08	0.03	0.05	−0.02	−0.11	−0.02	0.06	0.10
13. Industry	−0.10	0.12	−0.02	−0.01	0.21^**	−0.02	−0.01	−0.02	0.39***	−0.08	−0.29***	−0.11

^a The logarithm of entrepreneur age.

^†p < 0.10; *p < 0.05; **p < 0.01; ***p < 0.001.

To test the hypotheses, particularly the moderating effects, this study employed the widely adopted PROCESS approach (Preacher and Hayes, 2008) because (1) it decreases the likelihood of parameter bias and allows a comparison of the magnitude of the hypothesized effect versus the magnitude of other effects enacted by covariates, (2) it corrects potential homoscedastic estimation errors in Ordinary Least Square (OLS) models, and (3) it automatically employs the logistics analysis and produces more accurate results than the OLS method for dichotomous dependent variables (e.g. disbanding). In particular, this research examined the moderation effects with unstandardized coefficients from the full model and utilized bootstrapping procedures with 10,000 resamples to place 95% confidence intervals around the estimates of the moderation effects (Preacher and Hayes, 2008).

Table 2 presents the test results of the hypotheses. As indicated in Table 2, bribery demonstrates a significantly positive relationship with disbanding (coefficient = 5.26, p < 0.05), supporting Hypothesis 1. Table 2 also indicates that the interaction item of bribery and local economic development has a negative relationship with disbanding (coefficient = −0.80, p < 0.05), supporting Hypothesis 2 that the positive effect of bribery activity on venture disbanding is stronger when local economic development is low as opposed to high. This interaction was further interpreted by plotting the simple slopes for the relationships between bribery, local economic development, and disbanding at 1 standard deviation above and below the means. Figure 1 suggests that bribery is positively and significantly associated with disbanding when local economic development is low, yet the slope with high local economic development is negative. Lending further support to Hypothesis 2, these results indicate that weaker local economic development will make the effect of bribery on disbanding more pronounced.

Table 2.

Hypothesis test results.

Dependent variable = disbanding
	Coefficient
Bribery activity	5.26*
Organizing activity	1.36*
Local economic development	1.73*
Bribery activity × organizing activity	−0.60*
Bribery activity × local economic development	−0.80*
Organizing activity × local economic development	−0.20*
Bribery activity × organizing activity × local economic development	0.09*
Entrepreneur age^a	0.01
Entrepreneur education	−1.28**
Entrepreneur gender	1.11*
Prior work experience	1.06*
Idea age	−0.06
Target market	0.46
R&D	−0.28
Perception of economic institutions	0.30
Industry	−1.12
McFadden	0.16
Nagelkrk	0.24

^a The logarithm of entrepreneur age.

*p < 0.05; **p < 0.01; ***p < 0.001.

Figure 1.

The moderating effect of local economic development on the relationship between bribery activity and new venture disbanding.

Similarly, Table 2 presents that organizing activity has a negative moderating effect on the relationship between bribery and disbanding (coefficient = −0.60, p < 0.05), supporting Hypothesis 3 that the positive effect of bribery activity on venture disbanding is stronger when organizing activity is low as opposed to high. Figure 2 shows the simple slopes for the relationships between bribery, organizing activity, and disbanding at 1 standard deviation above and below the means. Figure 2 shows that bribery is positively and significantly associated with disbanding when organizing activity is low, yet the slope with high organizing activity is negative. Lending further support to Hypothesis 3, these results indicate that low organizing activity also makes the bribery–disbanding relationship more pronounced.

Figure 2.

The moderating effect of organizing activity on the relationship between bribery activity and new venture disbanding.

It is interesting to note that although not hypothesized, Table 2 indicates that entrepreneurs’ education has a negative impact on new venture disbanding, suggesting that the more education entrepreneurs receive, the more likely that they will persist in the new venture creation process. This result confirms prior research on the role of human capital in entrepreneurship (e.g. Rauch and Rijsdijk, 2013). On the contrary, entrepreneurs’ prior work experience has a positive impact on disbanding, indicating that entrepreneurs with more prior work experience are more likely to quit the startup process. A possible explanation for this result is that more prior work experience will enable entrepreneurs to have a more accurate evaluation of the advantages and disadvantages of the new venture creation, and thus to quit earlier for affordable loss (Sarasvathy, 2001). In addition, Table 2 indicates that entrepreneurs’ gender has a positive impact on disbanding, suggesting that female entrepreneurs are more likely to quit the new venture creation process than male entrepreneurs. This result seems to echo previous research that women-led businesses are more likely to fail under certain circumstances (Yang and Triana, 2019). Finally, although Table 1 indicates no significant correlation between bribery and disbanding, results in Table 2 indicate that bribery has a positive impact on disbanding when the control variables and other key variables (e.g. organizing activity and local economic development) are included in the analysis simultaneously. These findings confirm the appropriateness of the inclusion of these other key and control variables in the analyses as they jointly shape new venture disbanding with bribery.

Discussion

The intense competition and high failure rate that new ventures face can easily lure new ventures to bribery activity, an issue that has rarely been addressed in the entrepreneurship literature. As a departure from previous research investigating the drivers of firm bribery across nations, this research provides a theoretically integrated picture of the consequence of bribes supplied by firms as a strategic tool in dealing with government officials in the new venture creation process. Given that bribery consumes considerable amount of firm resources and managerial attention, firm bribery activity may exert a significant impact on business outcomes. In the process of new venture development, venture disbanding is a widely used indicator for new venture performance (Delmar and Shane, 2003). Thus, integrating resource-based view and resource dependence theory, the current study allows us to understand why the effect of bribery differs for new venture disbanding.

Theoretical implications

The findings presented in the current research contribute to entrepreneurship and corruption research in a number of ways. First, existing research suggests that bribery may be beneficial for new ventures because it will provide an opportunity for new ventures to level the playing field by enabling new ventures to establish connections with governments through payments to public officials with power. The current study, however, builds upon resource-based view to argue that firm bribery activity will hurt new ventures by increasing the hazard of venture disbanding. As there is no limit as to how much bribery can cost (Brouthers et al., 2008) and the bribery transactions are characterized with high uncertainty and instability (Uhlenbruck et al., 2006), new ventures, who bribe with the anticipation to reap special advantages, may still be placed at a competitive disadvantage. Thus, although bribery is likely to bring rewards, it also presents high risks for new ventures, exacerbating the already highly risky and highly uncertain entrepreneurial process. This will undermine the likelihood of new ventures to continue the venture development process.

Second, the current research contributes to resource dependence theory by demonstrating that joint consideration of both firm activities and environmental conditions is critical for predicting the effectiveness of the resource structures. Given that bribery actually hurts, rather than benefits, new ventures, the current study further provides an important first step toward identifying the conditions that determine whether bribery activity is ultimately increasing venture disbanding. Findings suggest that the harmful impact of bribery activity will be stronger in the absence of the key conditions for the new venture development (i.e. strong economic development and organizing activity). The effects of these two moderators substantiate our assertions that new ventures are more likely to rely on deviant means (bribery activity) to create opportunities and remove barriers to their survival if the necessary conditions for new venture creation are not fulfilled.

Another more general contribution of the current research is an appreciation of the utility that can be gained by incorporating both legitimate (i.e. organizing activity) and illegitimate (i.e. bribery) activities to enhance our understanding of the implications of firm bribery. Findings emphasize that higher organizing activity, as a firm strategy to reduce its dependence on the external environment, mutes the power of bribery activity to make survival more important than the legitimacy of the means used to achieve this goal and compromises firms’ ability to implement some of the corrupt practices. An alternative interpretation of our results is that when new ventures find themselves in situations where bribery is unavoidable, they may resort to legitimate practices to smooth the way. According to this alternative explanation, focusing on key entrepreneurial practices such as organizing activity would not cause more demands for bribes, instead it would serve as a mechanism for the new venture to counter the pressure for bribery and to maintain a clean image.

Practical implications

These results provide a clear picture of how bribery can impact new venture disbanding under different conditions of organizing activity and local economic development; thus, these findings offer important implications for entrepreneurs and policy makers as well. New businesses are constantly grappling with pressures to survive the new venture creation process. They have a strong interest in understanding what pressure they are likely to encounter to engage in corrupt practices and what factors can help them avoid red tape and enhance business efficiency. Under such pressures, entrepreneurs may be concerned with the potential long-term negative effect of ethically offensive activity on the image, reputation, and ultimately survival and growth of their new businesses. The findings of our analyses inform such firms that illicit behaviors will hurt new businesses. In addition, focusing efforts on seeking the right opportunities and resources for their new products or services may impede efforts to conduct business unethically. New ventures are also better prepared to mitigate the effect of bribery on disbanding if they are able to make insightful strategic decisions to focus on organizing activity required for the successful establishment of a new business. Overall, our findings provide guidance to entrepreneurs who attempt to determine how to legally and ethically increase their survival chances.

The findings reported in this study may provide policy makers a road map of where to devote public resources to addressing bribery by helping them identify the key firm-level actions and environmental support that can dampen the influence of bribery activities. Existing research suggests that although efforts aimed at enhancing the control of corruption at the institutional level seems powerful, it takes time for governmental reforms to produce any positive, visible impact because institutional trust is unlikely to accumulate instantaneously (Anokhin and Schulze, 2009). Results of our study suggest an alternative route for governments to control the effects of bribery, that is, by assisting entrepreneurs in their various organizing activities and by promoting local economic development. Previous research offers evidence that better control of corruption is positively associated with levels of innovation and entrepreneurial activities across nations (Anokhin and Schulze, 2009). Thus, to develop entrepreneurial economies, policy makers are urged to pay attention to not only measures that directly control corrupt activities but mechanisms that may indirectly control corruption by dampening the impact of corrupt behaviors.

Limitations and suggestions for future research

As with any study, this research suffers from certain limitations. First, it is important to acknowledge that the measure for firm bribery activity is perceptual in nature. Although prior research has reported extensive validation for this firm bribery measure (Martin et al., 2007; Spencer and Gomez, 2011; Uhlenbruck et al., 2006), the results of this study should be interpreted with this caveat in mind. Second, although the independent variable (bribery) and dependent variable (venture disbanding) were measured at 1 year apart, the nonlongitudinal nature of the data limits the generalizability of our results. Longitudinal data, along with archival measures for bribery, will also allow us to explore the long-term effects of bribery for new venture development. Third, as bribery involves both the supply-side and demand-side, a balanced examination of both the demand side (government officials) and supply side (firms) bribery is warranted. As deviance unlikely occurs only on one side, investigations of both sides of bribery will not only enhance our understanding of bribery but enable us to fight it efficiently. Further, in the current study, the original bribery measure was adapted to gauge whether firms have actually paid any bribes to public officials. Thus, informants’ potential response bias is likely due to the sensitive nature of bribery questions. Although great efforts were exerted in the survey design and data collection process to limit such response bias, without additional confirming evidence, the validity of this bribery instrument remains somewhat uncertain.

In addition, results of the current research signify the importance of two factors (organizing activity and local economic development) that shape the impact of bribery on new venture disbanding. Future research might be interested in seeking more direct measures that curb firm bribery activity. A major stream of research, rooted in the organizational behavior literature and attentive to cognitive and normative aspects of corruption, has identified an array of organizational corruption control such as bureaucratic control, punishment, legal/regulatory sanctioning, social sanctioning, vigilance controls, self-controls, and concertive controls (Lange, 2008). It might be fruitful for future research to extend the utility of this organizational corruption control framework to the new venture creation phenomenon by identifying which type(s) of these corruption controls are particularly effective to discourage entrepreneurs from committing bribery activities.

Another stream of research, focusing on the larger institutional orders, proposes that corruption is best remedied by propagating a new institutional logic through the efforts by institutional entrepreneurs to utilize the cultural, economic, symbolic, and social resources (Misangyi et al., 2008). Previous research indicates that firms pay greater bribes in a “pay to play” environment where financial incentives are stronger for bribery activity (Jeong and Weiner, 2012). As such, a precondition to reduce bribery would be to install effective, formal anti-corruption institutions (Tonoyan et al., 2010). In particular, as new ventures cannot really fundamentally change much of this environment, implementation of anti-bribery conventions at the institutional level seems to be an efficient mechanism that can deter firm corrupt behavior. As a case in point, the anti-corruption campaign, initiated by the Chinese central government, recovered US$519 million in only 1 year in 2018 (NBC News, 2019). To conclude, it is hopeful that this study makes contributions to the development of a robust research agenda in the entrepreneurship discipline and spurs intensified attention by entrepreneurs, public officials, and investors to the important phenomenon of bribery in the new venture creation process in contexts both within and outside China.

Footnotes

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: The work received funding from National Natural Science Foundation of China (71628204).

ORCID iD

Jintong Tang

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