Evaluating the impacts of corruption on firm performance in developing economies: an institutional perspective

Conventionally, corruption is viewed as deleterious to firm performance. Analysing World Bank Enterprise Survey firm-level data across 132 countries and controlling for other firm performance determinants, this paper finds that paying corrupt public officials enhances firm performance. This is argued to be because developing economies are characterized by formal institutional imperfections (e.g., inefficient public administration and the weak rule of law). Making bribe payments compensates for these formal institutional imperfections. Examining the policy implications of this rational economic act for entrepreneurs, but which is deleterious at the aggregate country level for economic development and growth, the argument is that public authorities should shift away from increasing the costs of corruption by improving the risks of detection and penalties, and instead focus upon the formal institutional imperfections that lead to endemic corruption in the developing world.