Greasing the Wheels of Commerce? Corruption and Foreign Investment

Abstract

There are considerable scholarly debates regarding the real consequences of corruption. Recent studies have argued that predictable corruption, in which bribers are guaranteed the delivery of government services, is less distortionary and more efficiency-enhancing than arbitrary corruption in which officials engage in simple plunder. Yet, the empirical evidence is mixed. Leveraging a vignette experiment embedded in an original firm survey in China, we find that overseas investors always consider corruption detrimental. There is some evidence that high-productivity and fixed-asset intensive investors might view predictable corruption more favorably than arbitrary corruption. Additionally, we find that compared to arbitrary corruption, predictable corruption is not associated with a significantly higher probability of market entry, but it increases the likelihood of majority ownership. Overall, the results provide little evidence that corruption greases the wheels of commerce even in a most likely case, and suggest that the perceived benefits of predictable corruption are limited.