Business Ethics 1.docx

Introduction The problem of creation of wealth has always been the in-focus of economic research. While the bulk of the literature emphasized the role of macroeconomic factors, the microeconomic foundations of economic prosperity escaped theoretical and empirical scrutiny. Building on Porter's (1990, 2007) approach to economic prosperity, the purpose of this paper is to empirically test the following: (1) The significant relationship of each of "business innovation" and "business ethics" (or corruption)--two seemingly unrelated principles--in underpinning the disparities in economic prosperity across a sample of 107 countries over the average period from 2003 to 2006; (2) the interaction between business innovation strategies and business ethics; and (3) the size and significant roles of macro- and microeconomic foundations in affecting economic prosperity. The microeconomic approach to economic prosperity gained much importance with the growing pace of globalization. Globalization increases the uncertainties of macroeconomic policies and makes countries more vulnerable to the fluctuation of variables, such as exchange rates and commodity prices among others. In fact, Argentina failed to experience a sustainable path of growth because the improvement of the microeconomic environment was not in-line with the macroeconomic reforms that the government has undertaken (Ketels, 2006). While the potential to create a competitive advantage at the corporate level lies in the development of innovative products and processes, including conducting innovation-driven business strategies, this paper suggests that corporate ethics, specifically corporate corruption should not be underestimated. Borrowing from Wu (2005), the tough enforcement of the Foreign Corrupt Practices Act may have forced U.S. companies to focus their attention on developing their long-term competitive advantage through implementing business innovation strategies leading them to be recognized as global leaders in their fields. Unlike Porter's et al. (2007) statistical approach which relies on partial correlations, this paper employs a general micro/macroeconomic framework and uses a multiple regression to examine the effects of business innovation and business ethics (corruption) on economic prosperity as measured by the level of per capita gross domestic product (GDP). It controls for salient features of economic prosperity, including human capital (education), geography (latitude), and socio-cultural demographics (religious fractionalization). Using the standardized estimation of the independent variables, this paper assesses the magnitudes between microeconomic and macroeconomic environments and their impact on economic prosperity. The rest of the paper is organized as follows. The second section reviews succinctly the related literature, while suggesting a synthetic theoretical diagram (Figure 1). The third section offers the specification of the model and the fourth section analyzes the econometric results. Finally, the fifth section concludes the study and provides some relevant policy implications.