Corruption culture of multinationals: Evidence from China

Abstract

Using administrative data and tax returns from multinational corporations, we investigate the impact of foreign cultural norms on corrupt practices within China. By leveraging time-varying ownership details of foreign shareholders, our research reveals that multinationals originating from countries with a prevalent corruption culture tend to exhibit greater corruption in China, as evidenced by increased entertainment costs, with a pronounced effect in industries with more rent-seeking activities. Corrupt foreign firms are more likely to secure subsidies and tax refunds from local governments and realize higher profitability. However, these practices lead to an insignificant change in their innovation outcomes. China’s anti-corruption campaign has significantly reduced the influence of foreign corruption culture, highlighting the importance of robust regulatory enforcement in shaping the behavior of foreign firms operating in emerging economies. Additionally, the influence of foreign culture extends to domestic firms, demonstrating a cultural spillover effect.