Does corruption boost or harm firms’ performance in developing and emerging economies? A firm‐level study
| Author | Aurora Teixeira,Jorge Cerdeira,Lurdes Martins |
| DOI | http://doi.org/10.1111/twec.12966 |
| Published date | 01 August 2020 |
| Date | 01 August 2020 |
World Econ. 2020;43:2119–2152. wileyonlinelibrary.com/journal/twec
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2119
© 2020 John Wiley & Sons Ltd
Received: 25 July 2019
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Revised: 20 April 2020
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Accepted: 1 May 2020
DOI: 10.1111/twec.12966
ORIGINAL ARTICLE
Does corruption boost or harm firms’ performance
in developing and emerging economies? A firm-level
study
LurdesMartins1
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JorgeCerdeira1,2,3
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AuroraA.C. Teixeira4,5,6
1School of Economics and Management, University of Minho, Braga, Portugal
2Institute of Sociology (IS-UP), University of Porto, Porto, Portugal
3CEOS.PP , ISCAP, P.Porto, Porto, Portugal
4CEF.UP, Faculdade de Economia, Universidade do Porto, Porto, Portugal
5INESC Porto, Faculdade de Economia, Universidade do Porto, Porto, Portugal
6OBEGEF, Faculdade de Economia, Universidade do Porto, Porto, Portugal
Funding information
Fundação para a Ciência e a Tecnologia, Grant/Award Number: UIDB/04105/2020 [Aurora A.C. Teixeira]
KEYWORDS
corruption, developing and emerging economies, firm performance, institutions, instrumental variables
Because corruption is usually considered wrong in itself, its mere existence is a cause
for concern.
(Rose-Ackerman,1997, p. 94)
1
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INTRODUCTION
Corruption is often identified as a strong deterrent to growth and development (Hanousek &
Kochanova,2016; Jain, 2001). It is defined as “an illegal activity (bribery, fraud, financial crime,
abuse, falsification, favoritism, nepotism, manipulation, etc.) conducted through misuse of authority
or power by public (government) or private (firms) officeholders for private gain and benefit, finan-
cial or otherwise” (Bahoo, Alon, & Paltrinieri,2020, p. 2), as well as being a multifaceted (Nur-tegin
& Jakee,2020) and resilient phenomenon (Williams & Kedir,2016).
In 2018, the United Nations Secretary-General, António Guterres, labelled corruption a “global
scourge”, which costs the world 5% of its GDP and deprives societies of growth-enhancing public
services such as schools/education and hospitals/health services. Corruption also pushes back foreign
direct investment and misallocates entrepreneurial talent.1 In line with this view, Mauro, Medas, and
Fournier (2019, p. 27) put forward that “if all countries were to reduce corruption in a similar way,
1See https://news.un.org/en/story /2018/12/1027971, last accessed on 27 March 2020.
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MARTINS eT Al.
they could gain $1trillion in lost tax revenues, or 1.25% of global GDP”. At the company level, the
OECD (2017) identified corruption as a “hidden tariff”, estimating that sales are levied by 5%–10%
for firms operating in markets where bribery is pervasive. To coincide with its 50th anniversary, the
World Economic Forum has launched a new Davos Manifesto and urged companies to show zero
tolerance for corruption.2
Such heightened concern in the sphere of public policy is mimicked in academia, where a growing
line of research on the topic of corruption has focused on both the macro and micro levels (Bahoo
etal.,2020). It has become one of the most widely discussed topics in the literature (Van Vu, Tran,
Van Nguyen, & Lim,2018). However, and contrary to the public policy concerns, the impact of
corruption on performance is far from consensual in academia (Nur-tegin & Jakee,2020; Sharma &
Mitra,2015). Indeed, it is the subject of ongoing, heated debate (Krammer,2019), particularly at the
micro level.
At the macro level, only a few empirical studies have found that corruption is growth enhancing
(e.g., Egger & Winner,2005, via FDI), particularly, according to some authors, in contexts where in-
stitutions are fragile or less effective (e.g., Dutt & Traca,2010; Méon & Weill,2010).3
At the micro/firm level, a growing number of empirical studies published in the last few years has
produced mixed, ambiguous and even contradictory results (Ashyrov & Masso, 2020; Ezebilo,
Odhuno, & Kavan,2019; Van Vu etal.,2018). Among the 50 micro-level empirical studies we have
analysed,4 focusing mostly on single countries, 31 studies have concluded that corruption (mostly
bribery) is harmful to firm performance, whereas 19 suggest the opposite. Several authors (e.g.,
Seck,2020; Williams & Kedir,2016; Williams, Martinez-Perez, & Kedir,2016) underline that the
impact of corruption on firm performance is likely to depend on the types, frequency and severity of
corruption. Ultimately, as Sharma and Mitra (2015) have acknowledged, whether corruption is detri-
mental or not to firm performance is an empirical question.
In this study, we have revisited this dispute through a relatively unexplored empirical line of re-
search based on a large set of countries (Asiedu & Freeman,2009; Batra, Kaufmann, & Stone,2003;
Kauffman & Wei,2000; Nur-tegin & Jakee,2020; Olney,2016; Seck,2020; Thakur, Kannadhasan,
Charan, & Gupta,2020; Williams & Kedir,2016; Williams etal., 2016). Specifically, we intend to
explore this issue on four levels.
First, our analysis covers more recent data (up to 2016), considering several dimensions of firm
performance, such as investment, sales, employment and productivity growth, in line with Seck
(2020), Williams and Kedir (2016) and Williams etal.(2016).
Second, the vast majority of the extant research uses bribery (informal payment officials demand
to perform a given official task) as the main proxy for corruption. In our case, though, we argue
that the link between corruption and firm performance should embrace the many, broader facets of
corruption besides bribery, which include state capture, political patronage, nepotism and cronyism
(De Rosa, Gooroochurn, & Gorg, 2010), that is, petty or bureaucratic as well as grand or political
corruption (Teixeira,2015). In this vein, we have selected global perceived corruption (whether the
firm perceives corruption as the biggest obstacle to its activities) as the key corruption proxy. We
have, nevertheless, confirmed the robustness of our results using the alternative bribery-based proxies.
2In https://www.wefor um.org/the-davos -manif esto, last accessed on 27 March 2020.
3See Table S1 for an overview.
4See Table S2.
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MARTINS eT Al.
Third, recognising that no single theory is likely to fully explain the link between corruption and
firm performance (Van Vu etal.,2018), we developed a comprehensive conceptual framework that in-
tegrates transaction cost economics (Williamson,1981), public choice theory (Rose-Ackerman,1978),
theory of entrepreneurial allocation (Baumol, 1990), the OLI (ownership, location and internali-
sation) paradigm (Dunning, 1981) and institutional (economics) theory (North, 1990) to highlight
the main mechanisms through which corruption “sands” (Baumol, 1990; Krueger,1974; Murphy,
Shleifer, & Vishny,1993; Myrdal,1968; Rose-Ackerman,1996; Wieneke & Gries,2011) or “greases”
(Bailey,1966; Huntington,1968; Leff, 1964; Lein,1986; Lui,1985) the wheels of business.
Fourth, our analysis focuses on a large sample of countries (117 in total), both emerging (high
levels of economic development, usually with rapid industrialisation) and developing (rely primarily
on agriculture and have a low income per capita). We thus complement the analyses by Krammer
(2019) and Thakur etal.(2020), who focused on, respectively, 30 and 16 emerging market economies,
and Seck (2020) and Williams etal. (2016), who investigated 132 and 60 developing economies,
respectively. These economies provide fertile ground for examining the impact of corruption on fir m
performance (Cuervo-Cazurra,2016) as they are, in general, characterised by heavily regulated indus-
tries, excessive provisions and requirements, bureaucratic barriers obstructing innovation, arbitrary
penalties, political and economic instability, and high prevalence and indulgence for corrupt practices
(Imran, Rehman, & Khan,2020; Krammer,2019).
Two main research questions are addressed in the present study: (a) Has corruption boosted or
harmed the firm performance of emerging and developing countries in the last two decades?; and (b)
To what extent is the link between corruption and firm performance mediated/ shaped by the countries’
institutional configurations (Spencer & Gomez,2011), firm size (Mendoza, Lim, & Lopez,2015) and
business strategy (exporters vs. non-exporters; Kalyuzhnova & Belitski,2019), as well as the indus-
tries’ competitiveness levels (Sahakyan & Stiegert,2012)?
Given the self-selection and omission bias that pervades this type of empirical analysis, and in
line with other relevant studies (e.g., Ashyrov & Masso,2020; Nur-tegin & Jakee,2020; Williams &
Kedir,2016; Williams etal.,2016; Wu,2019), we have opted for t he instrumental variable (IV) esti-
mation method applied to a sample of 21,250 firms located in 117 emerging and developing countries
gathered from the World Bank Enterprise Surveys.
The paper is structured as follows. The next section (Section 2) presents the conceptual framework
and the main hypotheses to be tested. Section 3 sets up an empirical model and describes the data set.
Section 4 reports and discusses the main results. Section 5 concludes, presenting the study's main
contributions, policy implications, limitations and avenues for future research.
2
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THE IMPACT OF CORRUPTION ON FIRM
PERFORMANCE: CONCEPTUAL FRAMEWORK, MAIN
HYPOTHESES AND EMPIRICAL EVIDENCE
2.1
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Conceptual framework and main hypotheses
From the perspective of transaction cost economics (Williamson,1979, 1985), corruption can be re-
garded as the transferal of a service between the bribe donor and the bribe recipient (Husted,1994). The
agents involved are boundedly rational and opportunistic. In other words, agents are “intendedly rational,
but only limitedly so” (Simon,1961, p. 24), and “self-interest seeking with guile” (Williamson, 1985,
p. 47). Indeed, cognitive limitations in corruption are significant and ex-ante planning is not feasible
(Husted,1994). Analysed through the lens of transaction cost economics (TCE), corruption can be seen
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