Bribery and firm survival in Vietnam: Moderating effects of market competition, credit, and institutional constraints

• Published date: 01 May 2023
• Author: Nam Pham Xuan,Thanh Ha Le
• Date: 01 May 2023
• DOI: http://doi.org/10.1111/rode.12982

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Bribery and firm survival in Vietnam:

Moderating effects of market competition,

credit, and institutional constraints

Nam Pham Xuan | Thanh Ha Le

Faculty of Economics, National

Economics University, Hanoi, Vietnam

Correspondence

Nam Pham Xuan, Faculty of Economics,

National Economics University, 207 Giai

Phong Str, Hai Ba Trung Dist, Hanoi,

Vietnam.

Email: nampx@neu.edu.vn

Abstract

This paper examines the relationship between bribery

and firm survival when facing different levels of market

competition, credit constraints, and other institutional

limitations. Using panel data from surveys of small-

and medium-sized enterprises in Vietnam over a

10-year period and a semi-parametric Cox proportional

hazards model approach, we provide empirical support

for the “greasing-the-wheels”hypothesis of firm

survival. Effects are found to be more pronounced for

formally registered and larger firms, explained by their

greater bargaining power vis-à-vis public officials.

Moreover, bribery as a “risk-of-exit”reducing strategy

is found only for firms not institutionally or financially

constrained and for firms operating in sectors with low

levels of competition.

KEYWORDS

bribery, survival analysis, the semi-parametric and parametric

model, Vietnam's enterprise

JEL CLASSIFICATION

C32, G12, Q43

1|INTRODUCTION

Corruption in the business environment occurs almost everywhere around the globe (Malesky

et al., 2015). It is exceptionally severe among developing economies with relatively weak institu-

tional quality, where government officials' activities are often not under the scrutiny of an

Received: 15 April 2022 Revised: 12 January 2023 Accepted: 13 February 2023

DOI: 10.1111/rode.12982

1242 © 2023 John Wiley & Sons Ltd. Rev Dev Econ. 2023;27:1242–1269.wileyonlinelibrary.com/journal/rode

effective check-and-balance system (Nguyen et al., 2016). In these cases, officials can abuse the

power that they were authorized for private gains (Cuervo-Cazurra, 2006).

From the perspective of the firms, widespread corruption forces them to take certain actions

to compete and survive. Firms might use many types of strategies to cope with corruption, and,

among them, offering bribes is one of the most popular (Galang, 2012; Zhou & Peng, 2012).

Bribery involves firms paying additional informal cost to government officials for certain bene-

fits. Without paying bribes, firms can face some serious challenges, including delays in getting

through bureaucratic procedures, being excluded from governmental assistant programs, and

being credit constrained (Nguyen et al., 2020a). Therefore, the decision to bribe involves various

costs and benefits that might affect the performance and survival of the firm. Following that

logic, this paper will conduct a survival analysis to investigate the effect of bribery on firm exit.

In economic literature, there are two distinct views on corruption. The first is a pure nega-

tive perspective, in which corruption is considered a blight on the market system. Corruption

deteriorates the business environment and sets up barriers to entry into a market that prevent

efficient firms from entering and inefficient firms from exiting, leading to misallocation of

scarce resources (Anokhin & Schulze, 2009; Bowen & De Clercq, 2008; Dyck & Ovaska, 2011).

Proponents of this view advocate a zero-tolerance policy toward any kinds of bribery. The sec-

ond approach sheds a relatively less negative light on corruption in general and bribery in par-

ticular. The argument is that, in cases where there are institutional issues that severely hamper

the operation of businesses, bribes can be used as a temporary solution to reduce the conse-

quences of those problems (Huntington, 1968). Successfully utilized, bribery might help firms

speed up administrative procedures, acquire necessary licenses, secure key resources, and

increase their overall efficiency (Galang, 2012; Krammer, 2019; Vial & Hanoteau, 2010).

Research on the effect of bribery on firm performance has not reached a consensus: two oppos-

ing theories have garnered a certain amount of empirical evidence (Zhou & Peng, 2012). The

“greasing-the-wheel”theory posits that bribery might have a positive effect on firm perfor-

mance, from growth to survival (Fisman & Svensson, 2007). In contrast, the “sanding-the-

wheel”theory states that the overall effect of bribe on firm performance is negative (Dreher &

Gassebner, 2013).

Recent research on this topic also distinguishes between two forms of bribery that are het-

erogeneous in their purposes and their effects on the performance of firms. The first is “greasing

bribe”—an informal payment to government officials to support the firms (Nguyen, Lê,

et al., 2020). The bribing firms do not conduct illegal activities since their purpose is that their

legal activities do not get hassled and delayed. In these cases, the firms often know the benefits

and costs of each bribe in advance, and the payments do not vary a lot between different bribing

firms. The other form of bribery is “rent-seeking bribe”—an informal payment from the firm to

government officials to have a competitive advantage (Ades & Di Tella, 1999; Bliss &

Tella, 1997). For example, several firms might enter a bribing game to secure a lucrative govern-

ment contract or access a critical resource. The source of this form of corruption is the barrier

to entry arising from government licenses or regulations. In these cases, there are only a limited

number of winners—firms that pay the highest amount and get the benefits, while the others

might lose money without getting anything back.

The first objective of this paper is to find evidence to decide whether bribing is a viable stra-

tegic move of the firm to survive in a business environment where corruption is the norm.

Leveraging a unique firm-level data set, the paper also distinguishes between the impacts of

greasing bribe and rent-seeking bribe. From that observation, we discuss what theory is more

appropriate for the situation in Vietnam.

PHAM XUAN and LE 1243