Corruption, Bureaucracy and Firm Productivity in Africa

• DOI: http://doi.org/10.1111/rode.12019
• Author: Hasan Faruq,David Yi,Michael Webb
• Published date: 01 February 2013
• Date: 01 February 2013

Corruption, Bureaucracy and Firm Productivity

in Africa

Hasan Faruq, Michael Webb, and David Yi*

Abstract

This paper estimates the impact of corruption and poor bureaucratic quality on firm productivity for a

unique dataset with firm-specific data of more than 900 firms over 12 years for Ghana, Kenya and Tanzania.

We first discuss why poor bureaucratic quality and, especially, corruption are expected to have negative

impacts on firm productivity.We then employ Data Envelopment Analysis to estimate firm productivity and

pooled OLS and Tobitregression analysis to estimate the effects of corruption and bureaucratic quality on

firm productivity. We find that less productive firms are more likely to engage in corrupt activities; both

poor bureaucratic quality and corruption reduce firm productivity; and corruption has a greater negative

impact on productivity.

1. Introduction

For some time, economists have been addressing the impacts of governance in

developing countries—especially corruption and bureaucratic effectiveness—on eco-

nomic performance. The key empirical findings from cross-country studies are that a

number of measures of poor governance, including corruption, reduce economic

growth (Mauro, 1995; Knack and Keefer, 1995; Mo, 2001; Li et al., 2000; Rivera-

Batiz, 2002; Meon and Sekkat; 2005). In a study of the various linkages between

corruption and economic growth, Hodge et al. (2011) find that corruption inhibits

growth as a result of its impacts on investment, human capital and political

instability.

A few recent studies have addressed the impact of governance on efficiency. Two

studies consider efficiency at the national level. Lambsdorff (2003) finds that corrup-

tion reduces national productivity, though Meon and Weill (2010) find that corrup-

tion has an adverse impact on national efficiency when institutions are effective and

a positive impact in the presence of poor institutions. Two studies estimate the

impacts of corruption on firm performance. Gaviria (2002) finds that corruption and

crime in Latin America have negative impacts on firm sales growth, though not on

investment. McArthur and Teal (2002) use firm-level data to examine the relation-

ship between corruption and firm productivity in African countries and find that

firms in countries with widespread corruption are 70% less efficient than those in

countries free of corruption. Here we investigate the impacts of both bureaucratic

quality and corruption on firm productivity. The development of firm productivity

* Faruq: Xavier University, Cincinnati, OH 45207, USA. Tel: 513-745-3054; Fax: 513-745-3692; E-mail:

faruqh@xavier.edu. Webb (corresponding author): Xavier University, Cincinnati, OH 45207, USA. Tel: 513-

745-3484; Fax:513-745-3692; E-mail: webbm@xavier.edu. Yi: Xavier University, Cincinnati, OH 45207, USA.

Tel:513-745-2933; Fax: 513-745-3692;E-mail: yid@xavier.edu. We would like to thank the participants in the

2009 Midwest Economic Association Meetings and an anonymous referee for their helpful comments.We

are responsible for any remaining errors.

Review of Development Economics, 17(1), 117–129, 2013

DOI:10.1111/rode.12019

© 2013 Blackwell Publishing Ltd