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Does firm growth increase corruption? Evidence from an instrumental variable approach

Abstract

Prior literature on the role that firm heterogeneity plays in corruption finds that larger firms pay smaller bribes and are less likely to pay bribes than smaller firms. These studies, however, often overlook the plausible reverse causality between firm growth or firm size and corruption. Utilizing an innovative identification strategy that accounts for this source of endogeneity, this study finds that increased firm size actually causes greater corruption and bureaucratic burdens on a typical firm and provides evidence against the argument for a uniform corruption burden regardless of size. It was determined that a one standard deviation increase in sales leads to 0.33 standard deviation increase in bribes, and to 0.36 standard deviation increase in management time spent dealing with public officials. Moreover, although corruption burden increases with increasing firm size, we find that this relationship is non-linear and diminishes in magnitude as firm size approaches to medium and large. We conclude with implications and policy considerations.

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Funding

Dr. Nguyen has been received a United Nations University UNU-MERIT Ph.D Fellowship and Indiana University’s postdoctoral fellowship funded by the Searle Freedom Trust when conducting this work.

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Correspondence to Thuy Dieu Nguyen.

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Appendices

Appendices

Table 4 List of countries in analyses and average corruption indicators
Table 5 Descriptive statistics of variables
Table 6 Correlation matrix of key variables
Table 7 Robustness check: using different sets of control variables
Table 8 Robustness check: using different instrumental variables
Fig. 3
figure3

Effects of firm size on kickback rate. This figure presents the adjusted difference (bar) and its 95% confidence interval (in error bars) in kickback rate attributable to firm size. The dataset represents one observation per firm per year, over the period of 2002–2005. All models are restricted to all firms which have completed data on dependent variables, independent variable, instrument variables, and control variables (5465 firms)

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Nguyen, T.D. Does firm growth increase corruption? Evidence from an instrumental variable approach. Small Bus Econ 55, 237–256 (2020). https://doi.org/10.1007/s11187-019-00160-x

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Keywords

  • Corruption
  • Firm growth
  • Firm size
  • Bribes
  • Kickbacks
  • Burdensome bureaucracy

JEL classification

  • D73
  • L25
  • L26