Transnational Deterrence Effects of the FCPA on China’s State-Dominated Sectors

• In Event: Rule of Law and International Finance

Abstract

The paper examines the impact of the U.S. Foreign Corrupt Practices Act (FCPA) on firms operating in China. I use a 2014 U.S. appellate court ruling to conduct a difference-in-differences analysis on firms that operate in China with listings in the U.S. stock markets. The 2014 ruling expanded the jurisdiction of the FCPA to include sanctioning bribery payments made to state-owned enterprises (SOEs). The diff-in-diff study finds that the 2014 ruling significantly deterred corrupt payments made by US-listed firms operating in China's state-dominated industries. Meanwhile, the ruling also hurts the business performance of these firms because corrupt exchanges with Chinese SOEs are required to obtain and retain business in these state-dominated economic sectors. The findings suggest that the extraterritorial deterrence effects of the FCPA can regulate the behavior of firms operating in foreign territories, which provides a form of institutional subsidy to countries with weak judicial institutions. The study suggests a new legal regime of global governance where countries with significant market power and judicial capacity provide legal interventions to correct corporate misconduct in developing economies. Globally-connected firms may therefore face an institutional dilemma when their operations across jurisdictional boundaries expose them to contradictory institutional requirements.

Author

• Jian Xu, Emory University