Trust and Perceived Corruption Among Ukrainian Firms

Abstract

This article investigates how firms build trust with one another and with third parties in endemically corrupt environments where trust is usually very low and significantly affected by corruption. Based on a representative survey of firms operating in Ukraine, an endemically corrupt environment, the authors explore some mechanisms for building trust. The study outcomes suggest positive correlations between the perception of corruption and trust among firms (especially through such mechanisms as using patronage at all levels, inviting business partners to restaurants or parties, and introducing business partners to family and friends), while other mechanisms (such as showing expertise in the field, developing communication competencies, and using notaries and lawyers to secure contracts) demonstrate no significant links. Moreover, the results demonstrate that foreign ownership might influence corruption and trust among firms. From a policy perspective, the authors recommend more work on understanding why firms engage in specific corrupt practices and less on destroying their informal relationships. International exposure might be an additional tool for mitigating corruption in Ukraine.

Keywords:

• business
• corruption
• enterprise
• informal and formal relationships
• trust
• Ukraine

JEL Classification:

• D22
• D73
• L2

ACKNOWLEDGMENTS

The preliminary findings were discussed at the Seventh International EBEEC (Economies of Balkan and Eastern European Countries) Conference, Kavala, Greece, May 2015. We thank Martin Huber, Johannes Leitner, Hannes Meissner, and anonymous reviewers for their valuable feedback.

FUNDING

This study was conducted with financial support from the Center for Governance and Culture in Europe at the University of St. Gallen. The sponsor influenced neither the research design nor the interpretation of the results.

Notes

1. http://www.transparency.org/research/cpi.

2. Corruption is usually defined as “the abuse of entrusted power for private gain” (Transparency International, http://www.transparency.org/whoweare/organisation/faqs_on_corruption#defineCorruption).

3. A monotown is a town that typically has only one large enterprise and the majority of the population works for this company. In the Soviet planned economy, it was very common for the government to allow a new enterprise and a new town to be built along with the appropriate infrastructure. Some famous examples from that time include the Baikonur Cosmodrome located in Leninsk (Kazakhstan) and the Chernobyl nuclear power plant located in Pripyat (Ukraine) (Denisova-Schmidt 2011). This practice still exists, as evidenced by AvtoVAZ in Togliatti or BaselCement-Pikalevo in Pikalevo in Russia (Denisova-Schmidt and Kryzhko 2015).

4. Blat in the USSR referred to the use of informal networks “to obtain goods and services in short supply and to find a way around formal procedures” (Ledeneva 1998, 1).

5. The analysis revealed a high correlation among the responses to all these questions. The percentage of the total variance explained is 65.3%. The factor loadings for the use of different informal practices on the principal component are 0.75 in public procurement, 0.77 when dealing with suppliers and customers, 0.77 in the remuneration of employees, 0.82 in the job application process, 0.87 in the use of firm resources for private purposes, and 0.86 in competing with other firms.

6. The interviews were conducted within the context of the large-scale project “Region, Nation and Beyond: An Interdisciplinary and Transcultural Reconceptualization of Ukraine,” by Viola Pokriefke (a Ph.D. student at the University of St. Gallen, Switzerland). The main study outcomes are included in Schmid and Myshlovska (2017).

7. Uslaner mentions that “the difference between generalized and particularized trust is similar to the distinction Putnam (2000, 22) draws between ‘bonding’ and ‘bridging’ social capital. We bond with our friends and people like ourselves. We form bridges with people who are different from ourselves” (2002).

8. Gifts are a very complex phenomenon. One of the main complexities of gift giving is its ambivalence: A gift could be “free,” or involve a “self-serving exchange” (Ledeneva 2016).

9. A reliability analysis of these two indices shows the high reliability of the informal practices index (Cronbach’s α = 0.72) and the weak reliability of the formal practices index (Cronbach’s α = 0.49) when the gift giving is included in index formation. When gift giving is excluded, Cronbach’s alpha for the informal practices index decreases to 0.62.

10. A six-region division of Ukraine is used, as follows: western region: Lviv, Ternopil, Ivano-Frankivsk Volyn, Rivne, Chernivtsi, and Zakarpattia oblasts; northern region: Zhytomyr, Chernihiv, Kyiv, and Sumy oblasts; central region: Khmelnitskiy, Vinnytsa, Cherkassy, Poltava, and Kirovohrad oblasts; southern region: Odessa, Kherson, and Mykolaiv oblasts and Crimea; eastern oblasts: Dnipropetrovsk, Zaporizhzhia, and Kharkiv oblasts; Donbas: Donetsk and Luhansk oblasts.

Additional information

Funding

This study was conducted with financial support from the Center for Governance and Culture in Europe at the University of St. Gallen. The sponsor influenced neither the research design nor the interpretation of the results.

Notes on contributors

Elena Denisova-Schmidt

Elena Denisova-Schmidt is a lecturer at the University of St. Gallen, St. Gallen, Switzerland. She is also affiliated with the Center for International Higher Education (CIHE), Boston College, Chestnut Hill, Massachusetts, USA as a Research Fellow. Yaroslav Prytula is a Professor at the Lviv Business School, Ukrainian Catholic University (UCU), Lviv, Ukraine.