TOPIC: IMPACT OF CORRUPTION ON FOREIGN DIRECT INVESTMENT AND EFFICIENCY OF UK’S BANKING SYSTEMS

Impact of Corruption on Foreign Direct Investment and Efficiency of UK’s Banking Systems Overall Aim Foreign Direct Investment has evolved to be a vital medium of connection between multinational firms and consumer markets worldwide. Nevertheless, numerous studies have identified an unequal distribution of FDI programs due to issues of corruption (Williams, C. & Kedir, A. 2016). Although commercial enterprises often engage in inter-boundary investments with the underlying goal of benefiting from low-priced inputs, factors including the levels of corruption, the rule of law, and political instability can interfere with FDI (Javorcik, B. & Wei, S. 2009). The most remarkable features of globalization include the increasing significance of direct investments in international markets and the ease of communication among foreign financiers. The notable rise in FDI in the past decades has stood out as a measure of a country’s integration into the global economy. In developed nations including the United Kingdom, public and private corporate administrators believe in the capacity of foreign direct investments to facilitate economic development, while developing investors’ interest through applying investment incentives, policies, and procedures. Over the past three years, the fast adoption of FDI programs has also been experienced in third world countries like Nigeria (Javorcik, B. & Wei, S. 2009). Despite the advantages of FDI in ensuring the continuity and productivity of business across international borders, the high level of corruption may cause a low-level flow of FDI in particular sectors. According to Javorcik and Wei (2009), corrupted financial and political systems hand over crucial administrative roles to incapable and inexperienced individuals through patronage, therefore introducing a notable level of instability into business processes. Corruption has been identified as a crucial factor that significantly impairs the stability of international business relations. Investigations focused on identifying the firm-level impact of fraud in contemporary enterprises have revealed that dishonest practices negatively impact on financial growth and economic development, therefore, necessitating the need for scholarly investigations into evidence-based strategies to regulate corruption (Williams, C. & Martinez-Perez, A. 2016). Moreover, Javorcik and Wei (2009) revealed that white-collar fraud is associated with a reduced competence of judicial, legislative, and executive governance bodies, as identified by scholarly investigations, which will be analyzed in this article. The primary objective of the proposed study is to examine the impacts of corruption on Foreign Direct Investment and efficiency of banking systems in the United Kingdom, and how fraudulent activities distort fundamental social and economic structures of governance. Moreover, this paper will examine the impact of fraud on the transparency of corporate bureaucracies, decision-making processes, and reductions of FDI flows.   Justification for Study The trends and patterns in the UK banking industry are largely influenced by established financial corporations including Barclays Bank, the HSBC, the Lloyds Group, and the Royal Bank of Scotland (RBS) (Economic Online, 2019). The region’s financial market is oligopolistic, judging by the market shares currently held by various business categories. In 2008, the United Kingdom’s banking sector was hard hit by a financial crisis that informed the decision to consolidate smaller enterprises (Economic Online, 2019). In early 2009, the Lloyds TBS and the Halifax Bank of Scotland (HBOS) amalgamated to form a larger banking enterprise, which also meant a significant increase in income flow and revenue generation for the shareholders (Economic Online, 2019). In 2015, the business announced a 27% rise in Lloyds bank’s market share, an improvement that was largely attributed to the 2009 merger (Economic Online, 2019). However, investigations have noted that Foreign Direct Investments may play a crucial role in further improving the efficiency and profitability of the banking industry, thus the need to study trends like corruption that reduce financiers’ interests in the sector. Within the past three years, the United Kingdom FDI flow has significantly reduced, a factor that is attributed to the Brexit poll conducted in 2016 (Romei, V. 2019). According to an official report by the Financial Times, business uncertainty issues have contributed to the reduction in FDI (Romei, V. 2019). The fiscal year ending March 2019 did record a 14% reduction in FDI projects into the region, which is the lowest level to be documented in the past six years (Romei, V. 2019). Thus, ensuring that major UK industries become attractive options for the international investor may necessitate providing increased support for the adoption of advanced innovations, creation of employment opportunities, and elimination of corrupt business practices, which increase the level of business uncertainty. Firstly, the rationale for the proposed research is grounded on the significance of commercial institutions in boosting a country’s economic. Secondly, achieving a consistent FDI flow places the UK’s banking sector in advantageous positions which attract international and local financiers to invest in the banking industry. However, gaining such competitive advantages may be compromised by corrupt business processes. Peres, Ameer, and Xu (2018) state that Foreign Direct Investment is a vital stimulator of employment opportunity creation, technological progressions, and productivity augmentation. As a result, FDI can positively influence economic growth and support the development of emerging economies by facilitating foreign exchange and tax revenue generation (Peres, M., Ameer, W. & Xu, H. 2018). However, past financial crises have negatively impacted on the success of foreign direct investment for both developed and emerging economies. According to statistics by Peres, Ameer, and Xu (2018), “the Global Vulnerability Monitor provided a decomposition analysis to measure the size of trade shocks relative to world GDP, the impact of trade shocks was 1.9% during the boom period of 2004–2007, the financial crisis provided a negative shock (–2.7%) in 2009, and trade shock impact was 2.5% in 2010–201” (p. 627). These findings confirmed that economic downturns might expose major weaknesses within established business structures, which were previously concealed during a financial boom. For example, the aftermath of the 2008 financial crisis enabled industries to identify weaknesses in their governance structures, which could interfere with FDI practices.   Research Objectives Although the research will focus on examining how corruption impact on the efficiency of firm performances and FDI, it will shed a special focus on the United Kingdom’s banking sector. The key questions that the proposed exploration seek to include are: 1. What is the role of foreign direct investments in reinforcing industry productivity? 2. What is the importance of institutional quality in supporting FDI? 3. To what extent does corruption affect UK’s financial firm performance and efficiency? 4. What are the general implications of corruption for UK banking sector? 5. What are some of the most effective strategies to eliminate corruption within the UK’s banking sector and subsequently enhance industry efficiency and flow of foreign direct investments?   Literature Review Corruption has been defined as a deep-rooted and extensive phenomenon which significantly impairs economic development and the nature of business relationships. According to Williams and Martinez-Perez (2016), fraudulent activities have detrimental impacts on the productivity of commercial enterprises as revealed by their scholarly analysis of firm-level data from the World Bank Enterprise research. The main causes of dishonesty in both established and rising enterprises identified by Williams and Martinez-Perez’s (2016) exploration include institutional imperfections, ineffective licensing guidelines, and resource misallocations. Corruption may also be as a result of discrepancies in standard definitions of what is considered appropriate by public and private regulatory institutions. The Role of Foreign Direct Investments in Reinforcing Industry Productivity The positive impacts of FDI on economic growth have been documented by Apostolov (2016), who based his findings on the World Bank Enterprise Survey. Based on empirical findings, theoretical concepts, international literature, and methodological approaches designed to determine the impact of increased FDI in the Southeastern Europe economy, Apostolov (2016) noted that FDI might lead to knowledge spillover. Apostolov (2016) also focused on examining whether or not increased FDI flow influenced labor and capital movement, or the creation of future services or products. In his findings, Apostolov (2016) stated that foreign-owned companies are often guided by more efficient systems of governance, and have advanced technologies and business links derived from parent organizations. For these reasons, supporting Foreign Direct Investment has been considered a fundamental priority for financial reforms in both emerging and developed economies due to the dominant perception that a consistent flow of income is a significant indicator of productivity growth, job opportunity creation, and technological advancements (Buzdugan & Tüselmann, 2018). Therefore, injecting additional financial resources into a host economy may enable a country upgrade internal industries. Buzdugan and Tüselmann (2018) also maintained that with the constant exchange of local distributors and suppliers between foreign-based and domestic companies, a business linkage is established, which subsequently leads to increased economic stability. For instance, over time, local professionals who were initially employed in international firms may acquire employment opportunities in local enterprises and introduce enhanced administrative ideas, models, or actions. With this regard, it has been established that while the effects of FDI are wide-ranging, they have a positive impact especially when adequately exploited. The Importance of Institutional Quality in Supporting FDI Numerous factors influence the institutional quality, including corporate governance techniques and corruption. Researchers, including Peres et al. (2018), argue that lack of property protection rights, high fraud prevalence, and political limitations are the most common institutional variables which deter the flow of FDI in a country. The ability of the United Kingdom banking sector to attract international investors mainly depends on the capacity of a business to offer stakeholders with a reliable model of interaction plays a crucial role in encouraging economic development. From the argument laid down by Peres and colleagues (2018), we can deduce that institutions whose reputation are marred by corruption have higher production expenses and uncertainty levels are compared to those who have effective administrative strategies in place. The findings by Peres et al. (2018) has been collaborated by Hayat (2019), who stated that there was a significant relationship between a country’s flow of Foreign Direct Investments, and economic growth. According to Hayat (2019), a firm’s “institutional quality” is an important attribute that influences the productivity of corporations operating under different industries. Hayat (2019) noted that organizations which are governed effectively and transparently support innovation, efficiency, and competition through facilitating knowledge spillover. International investors are more likely to finance institutions which they think are transparent. Peres et al. (2018) also explain that: Institutional factors, such as good governance and economic freedom, are becoming highly popular determinants of FDI, as the priorities of multinational companies (MNCs) are shifting from market and resource seeking to efficiency-seeking. Traditional FDI determinants, such as natural resources and low labor costs, are relatively becoming less important, while less traditional factors, such as governance and economic freedom, are becoming more popular. (p. 629). Impact of Corruption on UK’s Financial Firm Performance and Efficiency A recent report published by Lusher (2016) has categorized the United Kingdom’s financial sector as the most corrupt globally. These allegations have been backed by the Transparency International, through its head of research and advocacy Rachel Davis,who mentioned that: It is absolutely true that the UK is one of the leading financial centres for the laundering of corrupt money from overseas, whether through the property market, luxury goods or other sectors. The UK has been a prime location for stashing away illicitly gained wealth, as anti-money laundering systems are weak and sectors such as UK property represent a safe investment, as well as a place to hide corrupt money (Lusher, 2016 n.p). After investigators leaked the Panama Papers which covered confidential details about unregulated offshore accounts operated by influential individuals, Transparency International head said that the United Kingdom’s financial sector was involved in the laundering of billions of corrupt money per year. According to Lusher (2016), the level of corruption in the United Kingdom’s financial sector may have infiltrated the property market, as recent explorations revealed that an estimated 10% of property owned in Westminster were acquired through fraudulent means. The worrying degree of corruption within the UK’s banking and financial centers have been echoed by the region’s Financial Conduct Authority (FCA) via the Global Witness (2018) press release. As estimated by the FCA, the Standard Chartered and RBS banks recently took part in a corruption scandal that involved over $2 billion. A report published by the Global Witness (2018) uncovered the roles of UK’s reputable lawyers, auditors, and bankers in another financial scandal that is feared to have cost the Malaysian government a sum of $4.5 billion. There have been calls over the past months for investigations to be conducted in order to determine the institutional quality of UK’s banking sector as a whole, so far, the Global Witness oversight authority has identified the Standard Chartered and the RBS banks as notoriously corrupt agencies which are allegedly involved in the violation of money-laundering regulations, therefore making the United Kingdom banking industry a high-risk investment hub. The negative effects of corruption on industry and institutional performance have been extensively analyzed and documented by numerous researchers. Williams and Martinez-Perez (2016) maintain that contemporary investigators have adopted an institutional theory to understand the prevalence of fraudulent activities in various economies around the world. As with the case of the UK, troublesome managerial requirements and certain imperfections within an organization’s environment have made the issuance of bribes to powerful individuals a reasonable activity. However, Williams and Martinez-Perez (2016) revealed that graft negatively influenced firm efficiency and performance, as fraudulent public leaders and civil servants cause unnecessary delays in the implementation of profitable projects in order to receive bribes to speed up associated programs. These findings have been validated by McFarlane (2000) who noted that greater transparency, the impartial enforcement of corruption laws, and nepotism hinder sustainable development on a global scale. In this respect, bribery becomes a clear impediment to firm efficiency. Strategies to Eliminate Corruption within the UK’s Banking Sector According to the UK Anti-Corruption Plan (2014), policies that have been suggested to eliminate corruption in United Kingdom banking facilities must be aligned with international standards of integrity and requirements for sustainable growth. The UK Anti-Corruption Plan (2014) laid out numerous impacts of corruption on the country’s banking industry. The document associated increased prevalence of fraudulent practices with outcomes including threat on international reputation, economic growth, and national security. The recent scandals associated with major UK banking institutions demonstrates the country’s incapacity to tackle bribery and corruption at an institutional level. Current fears regarding the inexistence of effective corruption control measures in place have been echoed by the Global Witness (2018), which alleged tendencies by banking auditors and lawyers to ignore calls demanding investigations on the purported exchange of dirty money in banks like the Standard Chartered. As laid out by the UK Anti-Corruption Plan (2014), the government must implement the four crucial responses to the corruption that is currently being used in the Serious and Organized Crime Strategy (SOCS), which entails prosecution, pursuing, prevention, protection, and preparation procedures. The primary corruption deterrence objective of the SOCS strategy is to disrupt fraudulent practices, alleviate the negative effects of dishonesty, and inhibit public officials from engaging in exploitation.   Research Approach/Methodology Study objectives The proposed mixed-method descriptive research will focus on examining the effects of corruption on the flow of foreign direct investments and the efficiency of the UK’s banking corporations. Dependent and independent variables The primary independent variables that will be used to measure the impact of institutional dishonesty on firm efficiency and FDI flow include: 1. The prevalence of fraud, which estimates whether banking companies have experienced incidences of corrupt payments to facilitate major banking processes such as marketing. 2. The perceived necessity to engage in bribery- this will measure the respondents’ perceptions concerning the provision of incentives to public officials to facilitate crucial processes such as shareholder protection. The key dependent variables for the proposed research will be the annual profitability and employment growths as defined by GDP deflators. The selection of research participants This research will incorporate 50 participants selected through a snowballing sampling technique. The research team will only have to select three volunteers from the Standard Chartered and the RBS banks and provide them with the inclusion criteria for participants. The chosen individuals will suggest and contact suitable colleagues to take part in this study.   Data collection Data collection will be done through an intensive analysis of literary works published within the past decade. Additionally, non-structured questionnaires will be distributed to the chosen study respondents, through email to increase convenience. The study questions will be focused on examining the prevalence of corruption in UK banking industry, the importance of FDI, and how fraud has negatively affected the flow of FDI in the banking sector, from the perspective of influential policy-makers. Data analysis Being a mixed method research, data scrutiny will be done using the NVivo and SPSS software to facilitate an accurate coding, analysis, and interpretation of qualitative and quantitative data, respectively. The research assistants will categorize collected information into multiple themes before keying in the information in the computers. An independent data analyst will be involved in the study to check validity issues which may compromise the quality of data.

Type of assignment: Writing from scratch

Subject: Banking

Pages / words: 5 / 1400

Number of sources: 2

Academic level: Undergraduate

Paper format: APA

Line spacing: Double

Language style: US English

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