Export as shelter from domestic corruption: Theory and evidence from developing countries

Abstract

AbstractWhen corruption becomes a significant barrier to develop domestic business, do firms resort to exporting as a solution? In other words, is there a ‘shelter effect’ of exporting? We build a simple model to analyse the effects of corruption on firms’ domestic versus foreign market sales. The model predicts that when corruption increases the cost of domestic sales, large firms increase exports relative to domestic sales, whereas small firms do the opposite. Using data from the World Bank Enterprise Surveys, we provide supportive evidence to these predictions. We also find the ‘shelter effect’ to be weaker for politically connected firms.