INTRODUCTION
Network-based exchange based on personal trust is one of the prevailing characteristics of business culture in transforming economies. Social networks are commonly considered as umbrellas under which non-market transactions such as exchange of favors take place. These networks, such as guanxi in China or blat/svyazi [Footnote 1] in Russia, are on the one hand rooted in the cultural tradition of the respective countries, and on the other, their use was necessitated by the need for coping with the economy of shortages in those centrally planned economies (Hsu, Reference Hsu2005).
Guanxi and blat/svyazi as social networking practices, particularly in their historical contexts and in everyday life under communist rule in China and the Soviet Union, have been extensively documented (see, for example, Chen, Chen, & Huang, Reference Chen, Chen and Huang2013, on guanxi; Lovell, Ledeneva, & Rogachevskii, Reference Lovell, Ledeneva and Rogachevskii2000, on blat). After the 1990s market reforms in both countries, management scholars became interested in the ways in which market reforms changed the nature and use of guanxi and blat/svyazi in business (e.g., Batjargal, Reference Batjargal2007; Hsu, Reference Hsu2005; Michailova & Worm, Reference Michailova and Worm2003). While these networks have been found to share common features during the time of the centrally planned economies, they later developed in different directions in the era of market reforms (Hsu, Reference Hsu2005; Michailova & Worm, Reference Michailova and Worm2003).
Some scholars have argued that the Soviet practice of blat would have transformed into pure corruption after market reforms (Hsu, Reference Hsu2005), or become increasingly monetarized by losing its original function as a friendly exchange of favors (Ledeneva, Reference Ledeneva2009; Michailova & Worm, Reference Michailova and Worm2003; see also Williams & Onoshchenko, Reference Williams and Onoshschenko2015). Still others argue that the Soviet practice of blat would have been replaced with the more neutral, market-based networking practice of svyazi that literally means ‘connections’ (Batjargal, Reference Batjargal2007). In contrast, the literature suggests that the Chinese practice of guanxi would have continued to be a beneficial tool for networking, also in the socialist market economy (Hsu, Reference Hsu2005; Ledeneva, Reference Ledeneva2008), although part of guanxi networking has been seen as having a corrupt nature as well (Braendle, Gasser, & Noll, Reference Braendle, Gasser and Noll2005; Lovett, Simmons, & Kali, Reference Lovett, Simmons and Kali1999; Millington, Eberhardt, & Wilkinson, Reference Millington, Eberhardt and Wilkinson2005; Su & Littlefield, Reference Su and Littlefield2001).
Scholars have suggested that the different development of guanxi and blat/svyazi in the era of market reforms is associated with their underlying moralities, including the nature of trust in society (Hsu, Reference Hsu2005; Ledeneva, Reference Ledeneva2008; Michailova & Worm, Reference Michailova and Worm2003). Nevertheless, we argue that research on guanxi and blat/svyazi has mainly theorized them as neutral or positive networking practices, and not clearly explained how their underlying moralities may lead to negative practices such as nepotism or cronyism displaying the ‘darker side’ of social capital (Williams & Onoshchenko, Reference Williams and Onoshschenko2015).
Researchers have either mentioned in passing, corruption as being part of guanxi and blat/svyazi (e.g., Berger, Herstein, Silbiger, & Barnes, Reference Berger, Herstein, Silbiger and Barnes2017; Ledeneva, Reference Ledeneva2008; Michailova & Worm, Reference Michailova and Worm2003), or limited their treatment of corruption to one specific form such as elite exchange in Russia (Hsu, Reference Hsu2005) or gift-giving and bribery in business relations in China (e.g., Su & Littlefield, Reference Su and Littlefield2001; Millington et al., Reference Millington, Eberhardt and Wilkinson2005). Taking the advances in corruption research in a more fine-grained direction (see e.g., Cuervo-Cazurra, Reference Cuervo-Cazurra2016), we provide a more detailed analysis of various types of corruption hosted by guanxi and blat/svyazi networks. Specifically, we focus on the underlying moralities of guanxi and blat/svyazi as decisive factors that help explain the different network dynamics, including those that facilitate corruption.
This article is motivated by the above-mentioned gaps in the academic literature, as well as by our search for a theoretical explanation for the different corruption patterns that we have observed while doing fieldwork in China and Russia for the past several decades. In particular, our confidential discussions with foreign executives have revealed that while networking practices are essential for doing business in both countries, in Russia, corruption seems to have a more negative character and detrimental impact on businesses than in China. Our observations are supported by findings of empirical studies that describe Russian corruption as more disorganized and unpredictable than Chinese corruption (Doh, Rodriguez, Uhlenbruck, Collins, & Eden, Reference Doh, Rodriguez, Uhlenbruck, Collins and Eden2003; Larsson, Reference Larsson2006).
Thus, we address the following research question: How do network characteristics of guanxi and blat/svyazi relate to different types of corruption? We start with the argument that the interaction of social networks and corruption is contingent on the institutional environment (e.g., Choi, Reference Choi2007; Oldenburg, Reference Oldenburg1987; Scott, Reference Scott1972), which undoubtedly differs in China and Russia. Specifically, we view corruption as a form of reciprocal exchange that takes place in social networks (Warburton, Reference Warburton, Larmour and Volanin2013), which are based on broader structures of a country's culture and society. These structures include the nature of morality and general trust which serve as foundations for relationships in different layers of networks.
To establish a conceptual linkage between social network characteristics and corruption, we draw upon theories representing different research traditions, including economic anthropology, corruption research, and social network analysis. We first illustrate the social network structure as consisting of three circles of exchange, and apply the concepts of social distance (Sahlins, Reference Sahlins1974), as well as different types of reciprocity (Graeber, Reference Graeber2001; Sahlins, Reference Sahlins1974) rooted in economic anthropology. Then we map three categories of corruption onto these three circles of exchange. Whereas the inner circle is dominated by cronyism, ‘illegal favors done for loyalty or kinship’ (Scott, Reference Scott1967: 502), we posit that the most characteristic types of corruption for the intermediate and outer circles are bribery and extortion (Lindgren, Reference Lindgren1993), respectively. To find a theoretical explanation for the different types of corruption in social networks, we follow Li (Reference Li and Yeung2007a, Reference Li2007b) and argue that different forms of reciprocity are associated with different types of social ties (sentimental versus instrumental), which are rooted in the moral norms of the society in which the network is embedded. These moral norms include the perceptions towards other members of the society beyond the boundaries of the network and underlie the nature of corrupt behavior of network members.
We apply our conceptual framework to guanxi and blat/svyazi and contend that there are fundamental differences between the underlying moralities and thus the forms of reciprocal exchange in these networks. We argue that in China, guanxi networks exhibit a gateway characteristic (Gao, Knight, & Ballantyne, Reference Gao, Knight and Ballantyne2012) that allows both sentimental ties and closed reciprocity to expand to individuals in the outer circles of the network. As a consequence, corruption in guanxi networks is likely to have a mutually beneficial character that takes the forms of cronyism and bribery. At the same time, individuals in the outer circle can avoid being subjected to one-sided corruption in the form of extortion by being treated as prospective members of the inner circles.
In contrast, Russian blat/svyazi networks tend to be exclusive and have different moral rules for members and non-members (McCarthy & Puffer, Reference McCarthy and Puffer2008). The ties beyond the inner circle are purely instrumental, whereas closed reciprocity is strictly limited to the outer border of the intermediate circle. Hence, those in the outer circle are likely treated with negative reciprocity that transforms into extortion-type corruption. Thus, social or network reciprocity could potentially affect decisions about the type of corruption that a society might consider acceptable and even ethical.
This article extends comparative research on guanxi and blat/svyazi networks (Batjargal, Reference Batjargal2007; Hsu, Reference Hsu2005; Ledeneva, Reference Ledeneva2008; McCarthy, Puffer, Dunlap, & Jaeger, Reference McCarthy, Puffer, Dunlap and Jaeger2012; Michailova & Worm, Reference Michailova and Worm2003) by first conceptually unpacking how their underlying moralities, including trust, define the types of reciprocal exchange taking place in these networks. Second, we provide a fine-grained conceptualization of types of corruption as embedded in guanxi and blat/svyazi networks.
In addition to its theoretical contribution to the study of guanxi and blat/svyazi, our analysis has broader implications. The linkage that we establish between different network characteristics and different forms of corruption may help explain what we label the ‘China-Russia paradox’, i.e., why corruption and high economic growth can co-exist in China at least in the short term (Wedeman, Reference Wedeman and Gomez2002) in contrast to Russia, where corruption has been a serious deterrent to economic growth (Larsson, Reference Larsson2006; Levin & Satarov, Reference Levin, Satarov, Alexeev and Weber2013). We maintain that this paradox is due to not only different types of market reforms and transition paths as prior research (Larsson, Reference Larsson2006; Sun, Reference Sun1999; Wedeman, Reference Wedeman2012) suggests, but also due to differences in the societal and cultural context. Our conceptual analysis suggests that the benefits of networks and trust that prevailed in those centrally planned economies can eventually evolve into misallocation of resources during market reforms. Such misallocation takes place both in China and Russia but is particularly striking in Russia due to the prevalence of extortion type of corrupt exchange facilitated by the blat/svyazi practice.
The remainder of the article is organized as follows. We start by reviewing literature on types of corruption and on guanxi and blat/svyazi as networks of exchange. We then construct a conceptual framework to establish linkages between the structure of social networks, various types of corruption, and wider societal norms, and their manifestation in guanxi and blat/svyazi networks. Following a discussion section, we conclude with ethical and legal implications for doing business in China and in Russia.
CONCEPTUALIZING DIFFERENT TYPES OF CORRUPT EXCHANGE
Corruption is a multifaceted and multidimensional phenomenon, and its definitions vary according to the preferred view on the topic (Cuervo-Cazurra, Reference Cuervo-Cazurra2016). Our treatment of corruption builds on its broad definition as ‘the abuse of entrusted power for private gain’ (Transparency International, 2016), which may refer to both public and private sector corruption (Cuervo-Cazurra, Reference Cuervo-Cazurra2016). From the perspective of international management research, most relevant categories of corruption are public sector corruption, where transactions occur between government officials and private businesses, and private sector corruption between businesses. The focus of our analysis is on public sector corruption, as it is legally sanctioned in practically all countries, unlike private sector corruption that may be considered as an acceptable business practice in some countries (McCarthy et al., Reference McCarthy, Puffer, Dunlap and Jaeger2012).
There are several alternative typologies of corruption, which in addition to the public-private distinction, classify corruption into petty versus grand (Elliot, Reference Elliot and Elliot1997), organized versus disorganized (Shleifer & Vishny, Reference Shleifer and Vishny1993; see also Doh et al., Reference Doh, Rodriguez, Uhlenbruck, Collins and Eden2003 on arbitrariness of corruption), and corruption with or without theft (Shleifer & Vishny, Reference Shleifer and Vishny1993). In this article, the most relevant criterion for classifying different forms of corruption is the sidedness of exchange, i.e., whether the corrupt transaction results in mutual or one-way benefit. Wedeman (Reference Wedeman2012) notes that corruption involving public officials and private interests may consist of a mutually beneficial exchange in which the private party receives some benefit in return for engaging in a corrupt act. For example, a firm might receive a reduced customs tariff in exchange for a bribe, an exchange referred to as subversion (Beenstock, Reference Beenstock1979: 16). Other labels include dividend-collecting (Wedeman, Reference Wedeman1997: 459), profit-sharing (Sun, Reference Sun1999: 12), efficiency-enhancing (Li & Wu, Reference Li and Wu2010: 148), and collusive corruption (Sequeira & Djankov, Reference Sequeira and Djankov2014: 285). Such mutually beneficial corruption may be initiated either by the private party as the supplier or the public official as the demander of the bribe. Similarly, the first mover in a corrupt exchange in the form of cronyism may be either of the parties. (See, for example Rose-Ackerman, Reference Rose-Ackerman1999).
The corrupt exchange may, however, benefit only the dishonest state official (Rose-Ackerman, Reference Rose-Ackerman1999). Such forms of corruption are known as predatory corruption ‘in which the bribe is an extra on the top of the official price of the public good in question’ (Li & Wu, Reference Li and Wu2010: 149). It is also called extortionary (Beenstock, Reference Beenstock1979: 18), coercive (Sequeira & Djankov, Reference Sequeira and Djankov2014: 285), or non-collusive (Rose-Ackerman, Reference Rose-Ackerman1999: 15–17) corruption. In these situations, a public official always initiates the corrupt transaction and coerces a private party, for example, to pay a fee to gain access to a public service to which the latter was already entitled.
We build on these typologies and categorize corruption in three forms: cronyism, bribery, and extortion. From the legal perspective, bribery and extortion are debated, as they are difficult to disentangle (see, for example, Ayres, Reference Ayres1997; Lindgren, Reference Lindgren1993). We follow Khalil, Lawarrée, and Yun (Reference Khalil, Lawarrée and Yun2010: 180) and distinguish between bribery and extortion on the basis of whether the corrupt behavior helps or hurts the business enterprise, as we are interested in the ‘sidedness’ of the corrupt exchange. We view cronyism and bribery as two-sided transactions in which both parties benefit. Extortion, in contrast, represents a one-sided transaction in which the receiver is the only party benefiting. Hence, we extend existing micro-level typologies of corruption, which typically do not include non-monetary exchange but instead treat cronyism and corruption as separate concepts. We concur with Khatri, Tsang, and Begley (Reference Khatri, Tsang and Begley2006) and view cronyism as a subset of corruption.
GUANXI AND BLAT/SVYAZI AS SOCIAL NETWORKS
In this section we review the literature on guanxi and blat/svyazi, pointing to their historical and societal origins, functions, and development during the period of economic transformation from a centrally planned system to a more market-oriented one.
Social Network Characteristics of Guanxi
Guanxi can be broadly defined as a system of personal connections that carry long-term social obligations (Park & Luo, Reference Park and Luo2001), and also as the presence of direct, personalized ties between individuals (Tsui & Farh, Reference Tsui and Farh1997). A Confucian perspective involves a relational view referring to ‘a social, organizational, and moral system in which personal and small group relationships take precedence over both the needs and interests of the individual person and those of general and impersonal relationships found in large organizations and communities’ (Chen et al., Reference Chen, Chen and Huang2013: 177). Guanxi is rooted in the Confucian moral and political system, where the central institutions were the patriarchal state and the patriarchal family or clan. In other words, the rules of the family were extended to the society as a whole (He, Reference He2011), but with varying degrees of personal obligation and affection. Greatest obligation and affection was based on kinship, but also other members of the society had the potential to become pseudo-kin through guanxi gift exchange (Bian, Reference Bian, Beckert and Zafirovski2006). This opportunity to becoming ‘one of us’ is illustrated in the etymological origin of the word guanxi in the Chinese language, where guan means gate, and xi means special connections among people who passed through the gate (Gao et al., Reference Gao, Knight and Ballantyne2012).
After the 1949 communist revolution, guanxi networks expanded greatly due to economic necessity. Guanxi could be used to build enough trust to allow business transactions to succeed despite the inefficiencies of the centrally planned economy, in essence, a form of capitalism without contracts. Since people could obtain favors from ‘a friend of a friend of a friend’, they could reach out to a substantial population of useful contacts (Hsu, Reference Hsu2005). Additionally, although it has been debated whether China can be considered as a society of high general trust or as a society where strangers are perceived with distrust[Footnote 2], researchers have identified a mechanism where trust of ‘strangers’ is established through trust of ‘familiar persons’ (Luo, Reference Luo2005). This points to the central role of ‘bridge’ individuals who connect different guanxi networks (Luo, Reference Luo2005). Chinese are seen as being open to establish trust-based relationships and build guanxi relations with strangers as long as there is a common interest (Chen & Chen, Reference Chen and Chen2004). Hence, interpersonal trust has a ‘transferable’ nature (Batjargal, Reference Batjargal2007). On the other hand, recent research has shown that the general principles of trust and brokerage are relatively similar in guanxi networks and social networks in the West (Burt & Burzynska, Reference Burt and Burzynska2017). Similarly, the frequency and common history of interaction are important determinants of building trust in guanxi networks (Burt & Opper, Reference Burt and Opper2017; Chen & Chen, Reference Chen and Chen2004).
From the international management perspective, it has been said that ‘entering China's markets amounts to entering a huge web of guanxi’ (Su & Littlefield, Reference Su and Littlefield2001: 199). One dimension of this web is business to government guanxi that has been condemned as a main source of bribery (Braendle et al., Reference Braendle, Gasser and Noll2005). The culture of gift giving, which is an important means for building trust and nurturing guanxi relationships, provides a context in which bribery can be undertaken under the umbrella of guanxi (Lovett et al., Reference Lovett, Simmons and Kali1999), since such bribery follows the principle of reciprocity which is at the core of guanxi. However, there is a clear distinction between gift giving within guanxi that is concerned with building relationships, and bribery which involves illicit transactions (Steidlmeier, Reference Steidlmeier1999). Foreign executives’ accounts of corruption in China have demonstrated its embeddedness in local business networks (Karhunen & Kosonen, Reference Karhunen, Kosonen, Teixeira, Pimenta, Maia and Moreira2015), in which foreign firms may opt either to participate or stay out.
Social Network Characteristics of Blat/Svyazi
Blat – when understood broadly as an unofficial system of exchange of goods and services based on principles of reciprocity and sociability – has existed in Russia since tsarist times preceding the communist era (Fitzpatrick, Reference Fitzpatrick, Lovell, Ledeneva and Rogachevskii2000: 166). The word blat, however, originates from the criminal jargon of the pre-revolutionary era and it refers to petty criminal activity such as minor theft. The old word developed a new meaning in the very beginning of the socialist era. It was adopted to everyday use to refer to a personalized exchange of favors to cope with shortages of the socialist system. Blat was to a large extent unofficial, and its use was banned from the official discourse by authorities. As a practice it was also often illegal, as it included activities such as black-market trade. It was also against the socialist ideology, as it promoted individual's interest against the public interest (Ledeneva, Reference Ledeneva1998).
Some scholars argue that blat as a term would have become obsolete and should be replaced with the more neutral term svyazi, literally meaning ‘connections’ (Batjargal, Reference Batjargal2007). Others point that the terms blat and ZIS (znakomstva i svyazi, acquaintances and connections) were used in parallel already in the Soviet era and initially refer to the same practice that still persists (Ledeneva, Reference Ledeneva1998, Reference Ledeneva2009). In this article, we concur with McCarthy et al. (Reference McCarthy, Puffer, Dunlap and Jaeger2012) and use the formulation blat/svyazi in reference to the post-communist networking practice in Russia.
During Soviet times, blat was a necessary activity for Russians due to the shortage economy involving restricted access to goods, services, information, and other desired resources. Those engaged in blat were members of tightly knit communities who shared responsibility for the actions of others (Raiklin, Reference Raiklin2009). Belonging to the group meant being bonded to the other group members, and generally avoiding extending one's own network through bridging it to other networks as in guanxi. The members of a network knew not only with whom to exchange, but also whom to avoid (Jones, Hesterly, & Borgatti, Reference Jones, Hesterly and Borgatti1997).
Similar to guanxi, the blat system emerged from economic necessity, but not from a shared moral or value system such as guanxi. Mikheyev (Reference Mikheyev1987) argues that although Russia is often considered to be a collectivist culture, collectivism in Russia is not characteristic to the national mentality as in, for example, Asian countries, but was imposed by the economic system. Mikheyev continues that in general, Russians feel comfortable with people around them only if they are ‘right’ people, that is, friends or relatives. In the Soviet shortage economy, however, the support of others became a crucial necessity for survival. As a result, the community tended to fragment into numerous groups and subgroups that provided mutual support but were in constant competition with each other.
Without an integral moral structure, the lesson of blat for post-communist Russians seemed to be that one ought to secure personal benefits for members of one's circle at the expense of the state and those outside of the circle (Hsu, Reference Hsu2005). Hence, some scholars have argued that the blat would have transformed into pure corruption after market reforms (Hsu, Reference Hsu2005), or became increasingly monetarized (Ledeneva, Reference Ledeneva2009; Michailova & Worm, Reference Michailova and Worm2003; see also Williams & Onoshchenko, Reference Williams and Onoshschenko2015). Currently, the most prominent blat/svyazi networks are considered to be those of ‘elite exchange’ between powerful business persons and public authorities (Frye, Reference Frye2002).
From the perspective of trust, the closed nature of blat/svyazi networks reflects the Russian cultural traditions that are said to have produced an inclination to distrust individuals, groups, and organizations outside one's personal relationships (Ayios, Reference Ayios2004: 14), resulting in a ‘low trust society’ (Kuznetsov & Kuznetsova, Reference Kuznetsov and Kuznetsova2008). Distrust of political institutions was exacerbated in the Soviet period when the totalitarian state stifled the emergence of a separate civil sphere (Shlapentokh, Reference Shlapentokh1989). In addition, observers of Soviet society maintain that there was a high level of suspiciousness and mistrust among the Soviet people themselves as well (Mikheyev, Reference Mikheyev1987). Thus, in the Soviet era blat supported the norm of general distrust rather than nurturing general trust of those outside one's immediate network.
Without a way to build trust or extend networks, Russians have generally been seen as retreating into defensive attitudes and behaviors, engaging in predatory behavior against those outside their small circles of friends (Hsu, Reference Hsu2005). Even in recent times, although Russian business people might generally seek honesty in transactions, in the absence of a network relationship, they still tend to mistrust each other due to a business environment fraught with breaches of contract and little transparency (Radaev, Reference Radaev, Kornai, Rothstein and Rose-Ackerman2004). The hostile attitude towards ‘outsiders’ may explain why many foreign firms operating in Russia view corruption not as a ‘local’ phenomenon as in China, but as part of the business environment that foreigners are also subject to in the form of extortion (e.g., Karhunen & Kosonen, Reference Karhunen, Kosonen, Teixeira, Pimenta, Maia and Moreira2015).
Comparing Guanxi and Blat/Svyazi
We conclude the discussion on guanxi and blat by comparing the antecedents and functioning of these networks (Table 1).
Antecedents and functioning of guanxi and blat/svyazi
In sum, existing research has identified a number of common characteristics between Chinese guanxi and Russian blat/svyazi networks (Hsu, Reference Hsu2005; Ledeneva, Reference Ledeneva2008; McCarthy et al., Reference McCarthy, Puffer, Dunlap and Jaeger2012; Michailova & Worm, Reference Michailova and Worm2003). Both can be viewed as social resources based on continuity of relationships and trust (Michailova & Worm, Reference Michailova and Worm2003), and both networking practices were necessitated by the need for coping with the flaws of the centrally planned economy (Hsu, Reference Hsu2005). At the same time, there are important differences. Whereas guanxi has long historical roots and is based on the need to facilitate private economic exchange, blat/svyazi traces its origins to the early years of the centrally planned economy and its role was to facilitate individuals’ access to goods and services in the shortage economy. Moreover, the exchange of favors in the heart of both guanxi and blat/svyazi has a different basis. Whereas the exchange of favors in guanxi is based on moral and social obligation, in blat/svyazi it is more instrumental and based on expected benefit and reciprocity. The two networks also have different bases for building trust and different dynamics. Friendship and family ties are at the core of both networks, but in guanxi networks trust can also be built through common interest and frequent interaction, and therefore, they are open to expansion via trusted brokers. Blat/svyazi networks, in contrast. reflect the general distrust characteristic to Soviet society, where only true friends can be trusted completely, but partnership and cooperation are qualities too unreliable to build a long-term relationship upon (Mikheyev, Reference Mikheyev1987). Hence, Soviet network-based society was characterized as competing networks of mutual support (Mikheyev, Reference Mikheyev1987) rather than a ‘huge web of guanxi’ (Su & Littlefield, Reference Su and Littlefield2001: 199) connecting different networks through brokers.
We maintain that these differences help explain why guanxi and blat/svyazi have developed differently during market reforms (Hsu, Reference Hsu2005; Michailova & Worm, Reference Michailova and Worm2003). Guanxi has been seen as continuing to be a beneficial tool for networking, and also as a way to cope with institutional voids (Hsu, Reference Hsu2005; Ledeneva, Reference Ledeneva2008). In contrast, scholars have argued that the Soviet blat/svyazi practice ceased to retain its original meaning by either transforming into corruption and elite exchange (Hsu, Reference Hsu2005), or having developed into more market-like and impersonalized (Batjargal, Reference Batjargal2007) or monetary (Michailova & Worm, Reference Michailova and Worm2003) forms of network exchange. We will next elaborate on this argument and establish a theoretical linkage between underlying moralities and the nature of trust and corruption in guanxi and blat/svyazi networks.
CORRUPTION AND SOCIAL NETWORK CHARACTERISTICS OF GUANXI AND BLAT/SVYAZI
To establish a conceptual linkage between social network characteristics and corruption, we draw upon theories representing different research traditions, including economic anthropology, corruption research, and social network analysis. Figure 1 depicts our conceptual framework based on these theories.
Forms of reciprocity of exchange and social ties, and dominant forms of corruption in social networks
Our framework first depicts the social network structure as consisting of three circles of exchange, and incorporates social distance (Sahlins, Reference Sahlins1974) and different types of reciprocity (Graeber, Reference Graeber2001; Sahlins, Reference Sahlins1974) rooted in economic anthropology. Next, we map three categories of corruption onto these three circles of exchange. Whereas the inner circle is dominated by cronyism, we posit that the most characteristic types of corruption for the intermediate and outer circles are bribery and extortion (Lindgren, Reference Lindgren1993), respectively. We follow Li (Reference Li and Yeung2007a, Reference Li2007b) and argue that different forms of reciprocity are associated with different types of social ties, sentimental or instrumental, which are rooted in the moral norms of the society in which the network is embedded. These moral norms include perceptions towards other members of the society beyond the boundaries of the network and underlie the nature of corrupt behavior of network members. In the next sections we elaborate on the different components of our framework and apply them to guanxi and blat/svyazi.
Social Distance, Reciprocity, and Corrupt Exchange
Social distance and reciprocity help explain how the network position of a private business person and his or her social closeness to a public-sector official defines the nature of the corrupt exchange. The concept of social distance was introduced by economic anthropologist Marshall Sahlins (Reference Sahlins1974) to explain different forms of reciprocal relationships in tribal societies.
Reciprocity refers to the informal exchange of goods and services, whereas social distance is defined in terms of how far from the kinship center an exchange occurs. We consider these concepts as being particularly useful for studying relationship-based exchange in modern societies as well, since reciprocity has been recognized as being a universal phenomenon (Blau, Reference Blau1964). Reciprocity is considered a key principle of how business networks function worldwide (Schonsheck, Reference Schonsheck2000), including market-based societies (e.g., Graeber, Reference Graeber2001). In transforming economies such as China and Russia, exchange based on personal reciprocity is particularly important, since contract-based exchange mechanisms are not yet functioning credibly due to flaws in formal institutions. We adopt the terms open and closed reciprocity from Graeber (Reference Graeber2001) and negative reciprocity from Sahlins (Reference Sahlins1974).
Figure 1 depicts how the reciprocal nature of the relationship between a corrupt official and a business person, based on social distance, explains the type of corrupt exchange. We distinguish between three types of corruption: cronyism, bribery, and extortion. The first two are two-sided transactions in which both parties benefit. Cronyism occurs in the inner circle with the closest social distance and is based on open reciprocity. Hence, the government official's benefit is not immediate, but implies an anticipated favor in the future. Bribery in the intermediate circle, in contrast, is a mutually beneficial transaction based on closed reciprocity and immediate benefit for the government official in the form of a bribe. Finally, corrupt exchange within the outer circle is extortion based on negative reciprocity, where the only beneficiary is the corrupt official. In the following sections we discuss the three circles in more detail, including their connection to guanxi and blat/svyazi networks.
Open Reciprocity and Cronyism
The inner circle in Figure 1 is characterized by open reciprocity (Graeber, Reference Graeber2001), which does not entail the expectation of immediate reciprocity on the part of the giver. That kind of exchange includes favors among members of specific networks consisting of individuals with strong ties based on kinship, friendship, ethnicity, religion, school, workplace, mutual interest, or another grouping category (Khatri et al., Reference Khatri, Tsang and Begley2006). Thus, the government official and the business person may have such ties based on, for example, university studies or former employment history. In the guanxi literature such ties refer to a specific category of guanxi based on common social identity, anchored with clear social or even physical boundaries (Chen & Chen, Reference Chen and Chen2004). Similarly, family and kinship ties are an important condition for favor exchange in blat/svyazi networks (Ledeneva, Reference Ledeneva1998).
Favors do not involve bribery nor even immediate reciprocity (Luo, Reference Luo2005), but may be seen as unethical in some cultures or contexts because favors can create an unfair advantage for some individuals over others (McCarthy et al., Reference McCarthy, Puffer, Dunlap and Jaeger2012). Therefore, it is important to make a distinction between favoritism as a broader concept and cronyism as its corrupt form. Favoritism is not always related to corruption, as it may constitute an exchange of private favors in a purely private domain without public power involved. When public power (i.e., the duty for public interest) is at stake, favoritism takes the form of cronyism and is judged as corruption (Khatri et al., Reference Khatri, Tsang and Begley2006). Thus, favors become corruption when public officials breach their duty by giving preferential treatment to the recipient of the favor.
Accounts of corruption in China (e.g., Deng, Zhang, & Leverenz, Reference Deng, Zhang and Leverenz2010; Wedeman, Reference Wedeman2012) provide examples of cronyism. Public officials’ schemes to purchase land for the state at low prices and then invite relatives to act as land brokers to transfer it at a profit to developers would fall into this category (Deng et al., Reference Deng, Zhang and Leverenz2010). An example of cronyism in Russia reported in the media (Vasilyeva, Reference Vasilyeva2016), involved the Moscow city government having committed to buying subway cars from a company in which the chief of the Moscow transportation department had held a stake. The tender requirements favored that company, and despite violations found in the tender by the federal anti-monopoly agency, the tender was declared valid.
Closed Reciprocity and Bribery
The intermediate circle in Figure 1 is characterized by closed reciprocity, which is a direct exchange that is less personal than open reciprocity, and is most like market exchange (Graeber, Reference Graeber2001). With closed reciprocity, the parties view each other as having distinct economic and social interests and arrange an exchange that gives each what they are seeking. Such exchange is characteristic of business networks that may be based on mutual reciprocity, but the ultimate motivation for establishing and maintaining the relationship is one's own personal gain (Schonsheck, Reference Schonsheck2000). A typical example of closed reciprocity is kickbacks between private firms, where the individual in charge of the purchase receives financial or other compensation for making a favorable decision for a certain supplier. Such exchanges are typically viewed as conventional business practices in network-based societies such as China (Millington et al., Reference Millington, Eberhardt and Wilkinson2005), whereas in many Western countries, paying or requesting such ‘commissions’ is illegal.
The utilitarian principle underlying balanced exchange, according to Schonsheck (Reference Schonsheck2000), may eventually lead to requests for behavior that meet the criteria of corruption in terms of legality and/or ethicality. This is particularly evident where the network members are private and public-sector representatives. As noted by Warburton (Reference Warburton, Larmour and Volanin2013), the view of corruption as social exchange considers it as a transaction of resources which can be either material or non-material. Because of its convertibility (Warburton, Reference Warburton, Larmour and Volanin2013), the most frequent form of corruption based on balanced reciprocity is monetary bribery, such as when Chinese state officials allocate infrastructure construction projects to contractors in exchange for grease payments (Deng et al., Reference Deng, Zhang and Leverenz2010). Similarly, bribery in the form of kickbacks is an integral part of public procurement in Russia (Ivanov, Reference Ivanov, Teixeira, Pimenta, Maia and Moreira2015).
Regarding examples of bribery in China and in Russia, a number of cases have been reported in the media of Western multinationals, particularly in the pharmaceutical industry, having engaged in such activities. The most notorious case is that of GlaxoSmithKline (GSK), whose executives were accused by Chinese authorities of paying bribes to promote their products, resulting in substantial fines (Bradsher & Buckley, Reference Bradsher and Buckley2014). The corrupt practices included forging receipts for purchases and transactions that never took place, including fake conferences (Lee, Reference Lee2015). In the same vein, employees of the Israeli Teva Pharmaceutical Industries Ltd., the world's largest generic drug manufacturer, paid bribes to a high-ranking government official in Russia to use his authority to increase sales of Teva's multiple sclerosis drug in annual drug purchase auctions held by the Russian Ministry of Health (Lubitzsch & Baimakova, Reference Lubitzsch and Baimakova2017).
Negative Reciprocity and Extortion
The outer circle of our framework is characterized by negative reciprocity (Sahlins, Reference Sahlins1974) where transactions are conducted with the goal of providing net utilitarian advantage. This is the most impersonal type of exchange where the participants engage with opposing interests, each looking to maximize utility at the other's expense. The ‘reciprocity’ is conditional, a matter of defense of one's self-interest. The likelihood of achieving one's goals is related to the power each individual has over the other party (Casciaro & Piskorski, Reference Casciaro and Piskorski2005; Warburton, Reference Warburton, Larmour and Volanin2013). According to our research framework, power vested in public officials is generally greater than that of a business person, since public officials control resources vital for businesses to function. Hence, in the outer circle where the social distance is the greatest, corruption is more likely to take the form of extortion.
In contrast to bribery, where the business is receiving some benefit in return for the bribe payment, in extortion, the only beneficiary is the corrupt official. In business relationships, extortion is often linked to criminal activity, as extortion by definition is associated with implicit or explicit threat by the initiator of the transaction (Jeurissen, Reference Jeurissen2007: 204). When authorities are involved, such threats may force the closure of the business. Radio Liberty published a story of extortion faced by a store owner in Russia, where the economic crimes police confiscated his goods, worth about 60,000 rubles ($2,200). They inventoried the goods and took them away, and the next day ordered the businessman to appear at a police station where they told him confidentially, ‘We confiscated your goods worth 60,000 rubles. Give us 30,000 rubles, and the goods are yours’ (Lambroschini, Reference Lambroschnini2000).
Corrupt officials may also threaten to perform their tasks in a manner that is harmful to the operation of the business. An example of such extortion from China is when inspectors demand some compensation, or ‘kickback’, from suppliers in exchange for favorable reports of product quality. The goods produced at a factory may meet the formal requirements, but an unscrupulous inspector may threaten to submit a report to the contrary, unless some kind of ‘fee’ is paid (Niggl, Reference Niggl2017). In both examples, the only beneficiary is the corrupt official, while the entrepreneur incurs an additional cost.
Social Ties as a Determinant of Types of Corruption in Guanxi and Blat/Svyazi Networks
Our discussion has focused thus far on outlining the various types of reciprocity and corruption that exist in guanxi and blat/svyazi networks. We now provide an explanation for why a particular type of corruption becomes prevalent within these networks, in particular, why extortion is more commonplace in Russia than in China. We introduce the final component of our conceptual framework, the nature of social ties, and discuss the underlying morality and trust of these ties.
Particularistic trust and general trust
We posit that the nature of social ties determines the forms of exchange within social networks, following Li (Reference Li and Yeung2007a, Reference Li2007b), and view trust as the basis for differences in social ties. Particularistic trust involves a narrow circle of familiar others, and general trust, a wider circle of unfamiliar others (Delhey, Newton, & Welzel, Reference Delhey, Newton and Welzel2011; Luo, Reference Luo2005). We maintain that while corrupt exchange in the inner and intermediate circles, as depicted in Figure 1, is always based on particularistic trust, the nature of general trust may differ between societies and influence corruption in the outer circle.
The relationship between trust and in-group social networks has been prominent in the literature (Coleman, Reference Coleman1988; Granovetter, Reference Granovetter1983; Putnam, Reference Putnam2000), and networks have been seen as the ‘glue and lubricant’ of trust (Anderson & Jack, Reference Anderson and Jack2002). Trust can be defined as ‘a belief that other agents will act in predictable ways and fulfill their obligations without special sanctions’ (Radaev, Reference Radaev, Kornai, Rothstein and Rose-Ackerman2004: 91). Trust is seen as influencing the cost and efficiency of transactions that involve risk (Arrow, Reference Arrow1973), by lowering risk and uncertainty as well as reducing the need for control in complex situations (Höhmann & Malieva, Reference Höhmann, Malieva, Höhmann and Welter2005). Additionally, low-trust, familial societies incur high transaction costs, and thus can create only small networks with limited computational capacity, while high-trust societies can create large networks, enabling them to act as more powerful computers (Hidalgo, Reference Hidalgo2015). From the perspective of economic exchange, trust can be defined as a ‘willingness to rely on an exchange partner in whom one has confidence’ (Moorman, Deshpande, & Zaltman, Reference Moorman, Deshpande and Zaltman1993: 82). In social networks, trust may be based on interpersonal bonds, such as friendship and shared social norms, or be gradually created through frequency of interaction (Svejenova, Koza, & Lewin, Reference Svejenova, Koza, Lewin, Ariño and Reuer2006; see also Gulati, Reference Gulati1995).
As discussed previously, trust in Chinese guanxi networks is based either on common social identity or through trust of a familiar person and can be built gradually based on common interest and repeated interaction. Chinese people build their personalized trust-based circles and then connect them with the two outer circles, forming a much larger social network (Li & Wu, Reference Li and Wu2010), a reflection of the open gate possibilities of guanxi. As depicted in Figure 1, the boundary between the intermediate circle and the outer circle that refers to members of the society as a whole, is relatively permeable. In contrast, blat/svyazi produces an extreme level of particularistic trust within the inner circles, and little general trust to those in the outer one. Partnership and cooperation are viewed as being too unreliable to build a long-term relationship upon (Mikheyev, Reference Mikheyev1987) and thus frequency of interaction does not generate trust to the same extent as in some other societies. Therefore, the boundary between the intermediate and the outer circles is relatively impermeable. Particularistic trust binds those in the two inner circles, but the typical lack of general trust inhibits the formation of bridging ties to those in the outer circle.
Underlying moralities of particularistic trust
In addition to the different relationship between particularistic and general trust, social networks differ in the configuration of particularistic trust. Li (Reference Li and Yeung2007a, Reference Li2007b) argues that particularistic trust can have different configurations, including rational-cognitive, moral-norm, and emotional-affective aspects (Li, Reference Li1998, Reference Li2007c, Reference Li2008; Mayer, Davis, & Schoorman, Reference Mayer, Davis and Schoorman1995). The fundamental distinction is that the rational-cognitive aspect views social ties as informal means toward formal ends, whereas both the moral-norm and emotional-affective aspects view them as informal means as well as informal ends in themselves (Li, Reference Li2007b: 236). Therefore, the exchange within social networks is both instrumental and sentimental (Graen & Uhl-Bien, Reference Graen and Uhl-Bien1995; Li, Reference Li1998; Lin, Reference Lin2001) because the network consists of dyadic ties with different configurations of trust. Li (Reference Li and Yeung2007a, Reference Li2007b) also makes a distinction between personalized and generalized morality within networks. Personalized morality is the obligation to a specific person with a strong tie (Li, Reference Li2007c), while generalized morality is the obligation to all the members of a community (Putnam, Reference Putnam1993) with or without any direct ties.
Li's concept of personalized and generalized morality is in line with Sahlins’ (Reference Sahlins1974) theorizing that like reciprocity, morality is also sectorally organized. A given act would not in itself be ethical or unethical, but its ethicality may depend upon how distant the exchange partners are from one another (see also McCarthy & Puffer, Reference McCarthy and Puffer2008). Therefore, in our framework different moral rules would be applied to those in the inner, intermediate, and outer circles. We argue that in virtually all societies, exchange within the inner circle is based on personalized morality, which makes the exchange sentimental. What makes societies different is the way in which personalized morality interacts with generalized morality when moving towards the outer circles of the network.
In Confucian cultures such as China, where society is historically structured as an extended family (Li, Reference Li2007b: 233), networks are based on a strong moral-emotional aspect. The principle of personalized obligation, which is strongest in the inner circle of our framework, may color relations in the other circles as well. This is due to the Confucian principle of applying rights and duties of the family analogously to society as a whole (He, Reference He2011). Additionally, the successful accumulation of favor exchanges within the inner circle of the network raises a person's expectation of, and confidence in, the return of goodwill by others in general (Luo, Reference Luo2005). We argue that in such societies, corrupt exchange taking place in the networks nearly always exhibits the sentimental component, at least to some extent. Thus, extortion based on negative reciprocity and having a purely instrumental character is not as common as cronyism and bribery. Thus, we maintain that corrupt exchanges taking place among members of guanxi networks can generally be considered to have a sentimental and mutually beneficial character, rather than taking the form of one-sided, predatory extortion.
In contrast, some societies such as Russia are characterized by low levels of general trust, i.e., low trust in ‘unfamiliar others’ (Delhey et al., Reference Delhey, Newton and Welzel2011; Luo, Reference Luo2005), and in such societies, morality has a dual nature. Personalized morality and sentimental exchange are mainly limited to the inner circles of the network, whereas exchange in the outer circle is purely instrumental and based on negative morality. Such conditions provide a basis for extortion to prosper, since moral obligation found in the inner circle is not extended to the members of society as a whole. In such countries the principle of personalized obligation in the inner circle promotes the institutionalization of corruption.
DISCUSSION
In this article we have sought to explain why corruption seems to have a more negative character and deterring impact on foreign businesses in Russia than in China. We formulated the following research question: How do network characteristics of guanxi and blat/svyazi relate to different types of corruption? To address this question, we drew upon various streams of literature on guanxi and blat/svyazi, as well as insights from economic anthropology, corruption research, and social network analysis.
Our theoretical starting point was that the interaction of social networks and corruption is contingent on the institutional environment (e.g., Choi, Reference Choi2007; Oldenburg, Reference Oldenburg1987; Scott, Reference Scott1972), and China and Russia are different in this respect. We found support for this argument from existing literature on guanxi and blat/svyazi, which proposes that these networking practices would have developed in different directions during the period of transformation to a more market-oriented economy.
We viewed corruption as a form of reciprocal exchange that takes place in social networks (Warburton, Reference Warburton, Larmour and Volanin2013), which are based on broader structures of a country's culture and society. These structures include the nature of morality and general trust which serve as foundations for relationships in different layers of the networks. Research on guanxi and blat/svyazi has identified these aspects as potential explanations for the differences between these networking practices in the market transformation period. We developed this notion further and linked it to corruption, thereby addressing a gap in existing knowledge on guanxi and blat/svyazi.
We depicted the social network structure as consisting of three circles of exchange, and applied the concepts of social distance (Sahlins, Reference Sahlins1974) and reciprocity (Graeber, Reference Graeber2001; Sahlins, Reference Sahlins1974) rooted in economic anthropology. Then we mapped three categories of corruption onto these three circles of exchange. Whereas the inner circle is dominated by ‘illegal favors done for loyalty or kinship’ (Scott, Reference Scott1967: 502), we posited that the most characteristic types of corruption for the intermediate and outer circles are bribery and extortion (Lindgren, Reference Lindgren1993), respectively. Following Li (Reference Li and Yeung2007a, Reference Li2007b), we argued that different forms of reciprocity (open, closed, and negative) are associated with different types of social ties (sentimental and instrumental), which are rooted in the moral norms of the society in which the network is embedded. These moral norms include the perceptions towards other members of the society beyond the boundaries of the network and underlie the nature of corrupt behavior of network members.
When applied to guanxi and blat/svyazi, there are fundamental differences between the underlying moralities and thus the forms of reciprocal exchange in these networks. In China, guanxi networks exhibit a gateway characteristic (Gao et al., Reference Gao, Knight and Ballantyne2012) that allows both sentimental ties and closed reciprocity to expand to individuals in the outer circles of the network. As a consequence, corruption in guanxi networks is likely to have a mutually beneficial character that takes the forms of cronyism and bribery. At the same time, individuals in the outer circle can avoid being subjected to one-sided corruption, in the form of extortion, by being treated as prospective members of the inner circles.
In contrast, Russian blat/svyazi networks tend to be exclusive and have different moral rules for members and non-members (McCarthy & Puffer, Reference McCarthy and Puffer2008). The ties beyond the inner circle are purely instrumental, whereas closed reciprocity is strictly limited to the outer border of the intermediate circle. Hence, those in the outer circle are likely treated with negative reciprocity in the form of extortion. Thus, social or network reciprocity could potentially affect decisions about the type of corruption that a society might consider acceptable and even ethical.
This article extends comparative research on guanxi and blat/svyazi networks (Batjargal, Reference Batjargal2007; Hsu, Reference Hsu2005; Ledneva, Reference Ledeneva2008; McCarthy et al., Reference McCarthy, Puffer, Dunlap and Jaeger2012; Michailova & Worm, Reference Michailova and Worm2003) in several ways. First, it unpacks how underlying moralities, including trust, define the types of reciprocal exchange in these networks. In particular, we introduce the concept of negative reciprocity from social anthropology (Sahlins, Reference Sahlins1974) to the research on social networks in business studies, the latter discipline predominantly viewing such exchange as being positive and mutually reciprocal. Second, this article provides a fine-grained conceptualization of types of corruption as embedded in guanxi and blat/svyazi networks. In doing so, it advances previous research on guanxi and blat/svyazi that has mainly conceptualized them as neutral or positive networking practices. Our analysis of corruption provides an explanation of how the underlying moralities of guanxi and blat/svyazi may also lead to negative practices displaying the ‘darker side’ of social capital (Williams & Onoshchenko, Reference Williams and Onoshschenko2015). Finally, the article applies the conceptualization of guanxi as consisting of different circles into the analysis of blat/svyazi, which according to our knowledge has not been done before. Such an approach allows us to identify similarities in the structure of these networks, and also to underscore the permeability of the boundaries of these circles as a key difference between guanxi and blat/svyazi networks.
Our analysis has broader implications in that the linkage between network characteristics and different forms of corruption may help explain what we label the ‘China-Russia paradox’, why corruption and high economic growth can co-exist in China at least in the short term (Wedeman, Reference Wedeman and Gomez2002) in contrast to Russia, where corruption is a serious deterrent to economic growth (Larsson, Reference Larsson2006; Levin & Satarov, Reference Levin, Satarov, Alexeev and Weber2013). We maintain that this paradox is due not only to different types of market reforms and transition paths (Larsson, Reference Larsson2006; Sun, Reference Sun1999; Wedeman, Reference Wedeman2012), but also to differences in societal and cultural contexts. Our analysis suggests that the benefits of networks and trust that prevailed in the central planning system could eventually evolve into misallocation of resources in the subsequent period of market reforms. Such misallocation continues to take place both in China and Russia but is particularly striking in Russia due to the prevalence of the extortion type of corrupt exchange facilitated by the blat/svyazi tradition.
Limitations and Suggestions for Future Research
We invite future research to further develop and test our framework. This includes operationalizing its components into concrete measures and empirically testing the causal mechanisms that we proposed, including the relationship and dynamics between the various components. Propositions to be tested include social distance as an explanation for the type of reciprocity and its corruption equivalent in social networks, and the nature of social ties as the determinant of the permeability of the boundaries within social networks. Finally, our analysis of corrupt exchange in guanxi and blat/svyazi networks provides a limited picture of the spectrum of social exchange practices in transforming economies. We invite more fine-grained typologies that might emanate from other cultural contexts such as clan-based societies in Central Asia.
Ethical and Legal Implication for Doing Business in China and Russia
Our analysis provides important insights for foreign firms doing business in highly corrupt countries by addressing corruption as a social and cultural phenomenon. First, local managers of foreign firms may be used to the exchange of favors to the extent that they do not differentiate between acceptable favoritism between private parties and cronyism as a form of corruption. This is in part related to a different notion of law, including the degree of respect for formal, written law in different cultures. Therefore, in countries such as China or Russia, bending and even ignoring the formal, written law may be socially acceptable to fulfill obligations with one's personal network. For foreign firms, this implies a need for monitoring to ensure that cronyism will not take place as a means of maintaining business networks.
Second, our framework illustrates how engaging in cronyism or engaging in bribery both involve mutual reciprocity, but those practices differ in terms of their open or closed nature. Closed reciprocity associated with bribery is easier to identify and cope with than the open reciprocity of favors where a payback is not normally immediate. For example, large-scale bribery such as exchange of kickback payments for government contracts is relatively easy to recognize and deal with. Still, foreign executives who recognize the local acceptance of bribery should avoid the temptation to ‘do as the Romans do’ in the case of smaller-scale bribery, such as making facilitating payments for the timely issuance of various permits. It goes without saying that bribery is against the law even in highly corrupt countries and can entail legal consequences if a firm's involvement is exposed. For example, GlaxoSmithKline executives were accused of bribery by Chinese authorities, and the company was later fined nearly $500 million (Bradsher & Buckley, Reference Bradsher and Buckley2014). And companies can face severe fines under their own countries’ laws. For instance, violation of the Foreign Corrupt Practices Act resulted in Hewlett-Packard having to pay $108 million in 2014 for engaging in bribery in Russia, Poland, and Mexico (ibid.).
Third, extortion is the most difficult form of corruption for foreign executives to cope with due to its one-sided character. Unlike cronyism and bribery, which usually have a voluntary component on the part of the business person, yielding to extortion may well appear to be the only practical alternative to get, for example, permits necessary for running the business (Karhunen & Kosonen, Reference Karhunen and Kosonen2013). In Russia, such extortion is institutionalized as the practice of using informal intermediaries in dealing with corrupt authorities. Such practice narrows the circle of people communicating directly with an official and creates a protective barrier from undesirable ‘outsiders’ (Olimpieva, Reference Olimpieva2010). From a foreign firm's perspective, the cost of the bribe is often incorporated in the official ‘service fee’ of the intermediary, which makes the transaction appear to be legal. This practice may explain why smaller firms with limited resources may be tempted to ‘outsource’ corruption to intermediaries (see Bray, Reference Bray, Lambsdorf, Taube and Schramm2005; Fey & Shekshnia, Reference Fey and Shekshnia2011). In China, extortive behavior is to a greater extent controlled by cultural norms that prevent the formation of such closed circles around the officials.
Finally, networks, including the foreign business's home-country networks, may facilitate dealings with corrupt local authorities by developing relationships with members of inner circles that are influential with government officials, while still exhibiting behaviors with acceptable ethical standards in that environment (Karhunen & Kosonen, Reference Karhunen and Kosonen2013). However, in many cases, it might be more effective for such foreign businesses to develop their own relationships with networks in the host countries in which they operate (McCarthy & Puffer, Reference McCarthy and Puffer2008). Understandably, foreign firm managers must utilize the most appropriate networks to accomplish their business objectives within the prevailing ethical and legal constraints.
CONCLUSION
In conclusion, our framework suggests that when assessing the potential impact of corruption on doing business abroad, and primarily in transforming economies, company managers should investigate the ways in which corruption develops and gain an understanding of how and why it develops, especially in the case of extortion. In our view, this most harmful form of corruption is more prevalent in Russia than China due to differences between networks in those two countries, China's guanxi networks being markedly more permeable than Russia's closed blat/svyazi networks. These network differences are fundamental contributors to the prevalence of various types of reciprocity and trust that in turn determine the prevailing type of corruption.
