Corruption and firm-level productivity: greasing or sanding effect?
| Pages | 222-241 |
| Date | 10 September 2018 |
| Published date | 10 September 2018 |
| DOI | https://doi.org/10.1108/WJEMSD-10-2017-0067 |
| Author | Edward Bbaale,Ibrahim Mike Okumu |
| Subject Matter | Strategy,Business ethics,Sustainability |
Corruption and firm-level
productivity: greasing or
sanding effect?
Edward Bbaale and Ibrahim Mike Okumu
School of Economics, Makerere University, Kampala, Uganda
Abstract
Purpose –Corruption was ranked among the top five bigge st obstacles affecting the operation of
enterprises in Africa and was rated as a severe obstacle by close to 40 perce nt of firms in the sample.
Consequently, the pu rpose of this paper is t o investigate the rela tionship between cor ruption and firm
level productivity.
Design/methodology/approach –This paper uses the Enterprise Survey Data Set of the World Bank and
employs an instrumental variable (IV) approach to deal with the potential endogeneity of corruption in a
productivity equation. The authors use industry-country averages of the bribe tax and time tax as well as a
dummy of female ownership as IVs.
Findings –Using three different measures of corruption, the authors find evidence that corruption “sands
the wheels of commerce”and hence dampens firm-level productivity even when the endogeneity of corruption
is controlled for. The authors find no evidence to support the trade-off between bribe payments and
the red tape suggesting that government officials deliberately use bureaucracy as a mechanism of trapping
the most productive firms that can afford to pay higher bribes. Hence this study lends no support to the
“greasing”hypothesis.
Practical implications –The results thus suggest that in the second best choice environment firms are still
not better off paying bribes rather mitigating corruption could be ideal. Therefore alongside existing
regulatory corruption mitigants in the respective African countries, the paper suggests that government
through public information dissemination ought to enlighten firms that corruption is not productivity
enhancing. Thus firms are better-off evading corruption tendencies than propagating them.
Originality/value –The contribution to empirical literature is that much of the empirical studies have
overly concentrated on Europe and Asia and with very limited evidence available for African countries.
Therefore in terms of extending the work of McAuthar and Teal (2002) and Fisman and Svensson (2007),
the authors argue that by using a new data set stretching from 2006 to as recent as 2017 the paper is
rightly placed to make an empirical contribution about the relationship between corruption and
firm-level productivity.
Keywords Performance, Industry, Economics
Paper type Research paper
1. Motivation
One of the characteristics of a fragile institutional framework is existence of corruption.
Corruption is an act by unscrupulous government bureaucrats of extracting informal
payments or bribes from businessmen as a condition for rendering them otherwise official
service or to waive some laws and regulations (De Rosa et al., 2013). There are conflicting
views concerning corruption and the cost of doing business. One school of thought is the
“greasing of the wheels”hypothesis both theoretically and empirically. Theoretically,
proponents of the “greasing of the wheels”hypothesis argue that payment of a bribe to
government officials is a second-best option as it helps to break the red tape that is
associated with otherwise inefficient public sector (Leff, 1964; Huntington, 1968; Leys 1965;
Lui, 1985). Furthermore, corruption can be associated with efficiency gains especially when
it mimics a competitive market to the extent that the highest bidder wins that day.
For example in a competitive bidding for government contracts, it is the most profitable and
efficient firms that would pay the highest bribe (Beck and Maher, 1986; Lien, 1986).
Empirically evidence equally argues in support of corruption greasing of the wheels
hypothesis (Méon and Weill, 2010; Vial and Hanoteau, 2010). In essence bribe payment is
World Journal of
Entrepreneurship, Management
and Sustainable Development
Vol. 14 No. 3, 2018
pp. 222-241
© Emerald PublishingLimited
2042-5961
DOI 10.1108/WJEMSD-10-2017-0067
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2042-5961.htm
222
WJEMSD
14,3
associated with efficiency gains to the extent that it speeds up a transaction which leads to a
lower “time tax.”
Conversely, corruption has been argued to “sand the wheels”of the production space.
For example, Myrdal (1968) argues that bureaucratic rigidities is a creation of public
officials to incentivize entrepreneurs or households to pay bribes when demanding for
public services. In that regard, public officials would always have an incentive to
artificially create bureaucratic delays which ultimately distort firm behavior
sub-optimally hence “sand the wheels.”Indeed, empirical evidence has argued in favor
of corruption propagating efficiency losses (De Rosa et al., 2013; McArthur and Teal, 2002;
Meon and Sekkat, 2005). Corruption results in efficiency losses because it:
induces resource misallocation (De Rosa et al., 2013); exacts an extra burden on
entrepreneurs which might result into a disincentive or inability to expand production
activities (De Ros a etal., 2013; Alesina and George-Marios, 2005); may be characterized by
multiple bribe payments at different bureaucratic stages thereby reducing firm profits
( Jain, 2001); and induces system failure within government as corrupt officials seek to
maximize their illegal income (Kurer, 1993).
Non-convergence in debate regarding the effect of corruption on economic outcomes is
the essence of this paper. Using a World Bank Enterprise Survey (WBES) panel data set of
26 African countries, this paper explores effect of corruption on firm productivity. In essence
does corruption “grease the wheels of commerce”or “sand the wheels of commerce”? Our
results indicate that corruption “sands the wheels of commerce.”Indeed, we are able to show
that merely paying a bribe does not reduce time wasted interacting with government
officials to the extent that even then firm productivity is undermined. Our results remain
robust even after instrumenting for bribe payment and time tax using the country-industry
average of bribe payment and time tax.
Our results are consistent McArthur and Teal (2002) who equally show that firm
productivity reduces by 20 percent among firms that pay bribes while at the global levels,
firms in economies with a degree of corruption are 70 percent less productive than firms in
economies with lower levels of corruption. Furthermore, our result is also consistent Fisman
and Svensson (2007) who while using a Ugandan firm level data set show that a
one-percentage point increase in the bribery rate is associated with a reduction in firm
growth of three percentage points, an effect that is about three times greater than that of
taxation. Similarly, using WBES data set for Central and Eastern Europe and the CIS
De Rosa et al. (2013) show that bribery undermines firm productivity the effect of the time
tax is insignificant. Furthermore, using nationwide surveys of provincial institutions and
private manufacturing small and medium enterprises Tuyen et al. (2016) argue that that
bribe intensity has a negative effect on firm-level productivity. However, our result is
inconsistent with Tuyen et al. (2016) who with the aid of nationwide surveys of provincial
institutions and private manufacturing small and medium enterprises in Vietnam show that
corruption clogs productivity.
Our contribution to empirical literature is that much of the empirical studies have overly
concentrated on Europe and Asia and with very limited evidence available for
African countries. For example, McAuthar and Teal (2002) used firm level data for
27 African countries to study the impact of corruption on firm productivity. These authors
used data collected in 2000/2001; however, there are new waves of WBES stretching from
2006 to as recent as 2017 for some African countries. Another study is by Fisman and
Svensson (2007) that used Ugandan Industrial Enterprise Survey to study the impact of
corruption and taxation on firm growth. These authors focused on one country and hence
had limited number of observations uses a rich sample of African countries[1] which enables
us to control for the country specific effects associated with economic growth and the
business environment quality. Additionally, they used a data set collected during the period
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Corruption and
firm-level
productivity
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