Unsolicited justice: the impact of FCPA enforcement on corruption and investment

Can transnational anti-corruption enforcement affect government-business interactions in the targeted countries? Conventional research has focused on the responses of state and firms separately to extraterritorial legal interventions, instead of changes in the way of interactions among different actors. This paper provides a systematic analysis of the affected local economies by examining the responses of firms and government officials as a whole to transnational legal scrutiny. The study uses an original dataset on the enforcement actions of the Foreign Corrupt Practices Act (FCPA) to examine its impact on political risks faced by multinational corporations (MNCs) and changes in their behavior. I argue that transnational law enforcement provides a form of institutional subsidy to developing countries that lack robust legal regimes. I find that FCPA enforcement discourages actors on both ends of corrupt exchanges: Host government officials who receive bribes and MNCs who offer bribes. However, external enforcement only raises the costs and the threshold of engaging in bribery. Firms are pressured to pursue more lucrative business deals as risk premiums, and firms that cannot sustain corrupt arrangements lose rent-seeking opportunities. This paper has important implications for the global rule of law and transnational regulation, especially regarding emerging economies.