Corruption, Innovation and Firm Performance: Global Empirical Analysis

Abstract

Corruption is a worldwide phenomenon. Both developed and developing countries are facing this problem. It may be the politician who illegally uses his power to obtain undue favor by bending the law, or it may be in the form of informal payment to the local officer to “get things done.” It could be embezzlement by a public official or it could be a multinational organization that offers bribes to avail contract. It affects the country economically, politically and socially. It impedes growth, reduces investment, distorts government expenditures, increases inequality and poverty, decreases public trust in institutions and strengthens the size of the informal economy. Hence, what the consequences of corruption is primarily an empirical question. In this thesis, we firstly identified the factors that are responsible for firm level corruption and then we investigate the micro-level impact of corruption on firm performance and innovation in 147 economies using the data-set of World Bank’s Enterprise Survey. We have performed an empirical analysis of 147 countries in aggregate, as well as income and region-wise, disaggregated groups to quantify the impact of corruption on firm performance and firm level innovation. We have applied Ordinary Least Squares to find the impact of corruption on firm performance. Logistic regression model is applied on determinants of corruption and the impact of corruption on firm level innovation. Control variables such as bureaucratic problem, firm age, firm size, ownership of the firm, manager experience, external audit, and exports are used to cater to the problem of endogeneity. The results indicate that bureaucratic problem, taxation, and crimes increases the likelihood of corruption, while external audit, exports decrease the likelihood of corruption in aggregate as well as disaggregated analysis of income and regional groups. In the aggregate analysis, corruption increases firm performance, and in the income group, it increases firm performance in the case of low income economies. However, it increases firm performance in the case of High xxiv Income economies. In regional groups, it has positive effect in Asia & Pacific, Europe & Central Asia, Middle East & North America and in South Asia and negative effects in Latin America & Caribbean, OECD and Sub-Saharan Africa. Results for firm level innovation indicate that in the case of high income and upper middle income countries, Asia & Pacific and OECD the corruption works as sand the wheel and in case of lower middle countries, Europe & Central Asia, Latin America & Caribbean and in South Asia, it works as grease the wheel. It is clear from the results that bureaucratic hurdle is the key factor for corruption. To reduce the probability of corruption and to increase firm performance, there is a greater need for good governance. Bureaucratic problem could be reduced through simplifying the procedure for obtaining license and permit and by allowing the firm to start its operation through less documentation and less interaction with public officials. The malfunctioning of public officials could be reduced by increasing the quality of the institution. The government should propagate information that corruption is the social and economic norm and encourage honest officials and firms by reward. Keywords: Corruption, Innovation, Firm performance, Bureaucratic problem, Rent Seeking, External Audit.