Corruption, firm productivity, and gains from import liberalization in China

Abstract

Is corruption in China detrimental or beneficial to firm productivity and by what channels? Opinions concerning this issue differ and analyses rarely consider import liberalization and firm heterogeneity. Using China's firm-level census data and the corruption measures based on provincial filed corruption cases across 1998–2007, we examine the impacts of corruption on firm productivity in China. We find that corruption in China negatively impacts firm productivity by increasing the prices of imported intermediate inputs, reducing the number of imported varieties, and hindering productivity gains from import liberalization, especially for small, private, and productive firms. Instrumental variable estimates using data on government audits and individual attributes of anti-corruption leaders confirm the consistency of our findings among other robustness checks. Our results suggest that productivity gains from import liberalization could still be promoted in developing countries like China by reducing their domestic corruption.