High-corruption Countries Research Articles

Corruption and Firm Growth: Evidence from around the World

Abstract We empirically investigate the relationship between corruption and growth using a firm-level dataset that is unique in scale, covering almost 88,000 firms across 141 economies in 2006–20, with wide-ranging corruption experiences. The scale and detail of our data allow us to explore the corruption-growth relationship at a very local level, within industries in a relatively narrow geography. We report three empirical regularities. First, firms that make zero informal payments tend to grow slower than bribers. Second, this result is driven by non-bribers in high-corruption countries. Third, among bribers, growth is decreasing in the amount of informal payments—in both high- and low-corruption countries. We suggest that this set of results may be reconciled with a simple model in which endogenously determined higher bribe rates lead to lower growth, while non-bribers are often excluded entirely from growth opportunities in high-corruption settings.

On the relationship between corruption and bank lending activity: European evidence

PurposeThis paper aims to study the effect of country-level perceptions of corruption on commercial banks’ lending activity over the importance of loans and the quality of loan portfolios of banks in Europe.Design/methodology/approachThe paper uses country-level perceptions of corruption scores from Transparency International, individual bank-specific data from ORBIS and macroeconomic data from the World Bank. The sample is composed of 640 commercial banks in 42 European countries from 2013 to 2019. The authors estimate, by pooled OLS, the relationship between corruption and the importance of loans and the quality of the banks’ loan portfolios. In addition, several robustness tests reinforce the results.FindingsThe results show that corruption negatively impacts the importance of loans in bank assets and positively impacts the proportion of bad loans. In addition, trade openness increases the weight of loans and the weight of nonperforming loans. Bank size, capital and risk also affect bank lending activity. Finally, European Monetary Union (EMU) membership reinforces the negative (positive) effect on loans (bad loans).Research limitations/implicationsThe results highlight the importance of fighting corruption. Governments, regulators and banks benefit from pursuing transparency-oriented policies to decrease the perception of corruption and foster economic development.Originality/valueThe literature on the impact of corruption on bank lending activity focuses mainly on high-corruption countries. This paper studies the European case, scarcely investigated in the literature, in the aftermath of two international financial crises and when significant regulatory transformations in banking supervision were instituted in the EMU countries.

Government Support During COVID-19 and Corruption

We analyze the allocation and effectiveness of government support in response to the COVID-19 outbreak across a nationally representative sample of firms in 32 countries representing different levels of institutional transparency. The probability of receiving government support is higher for larger firms, firms belonging to business support groups and innovative firms in low corruption countries. In high corruption, countries firms competing against unregistered establishments, with lack of internationally recognized quality certification and no formalized business strategy are more likely to receive government support. Using the panel structure of the data to address reverse causality, selection bias and unobserved heterogeneity, we then find that government support improves firm-level outcomes more strongly in low corruption countries. Among different types of government support, we find wage subsidies to be more effective in high corruption countries while technical assistance for adoption of digital technologies in low corruption countries. In addition, social distancing and lockdown policies do not seem to be as effective in improving firm-level outcomes in high-corruption countries most likely because of weaker capacities to enforce such policies. These results show the importance of enhancing systems of accountability and enforcement procedures that will ensure that fiscal stimulus aid is deployed to benefit those who need it the most.

Exchange rate volatility, corruption, and economic growth

This study assesses the impact of exchange rate volatility on economic growth using a panel of 194 countries for the period 1995–2019. We resort to dynamic panel data models considering the exchange rate volatility estimated based on GARCH models as an explanatory variable, along with some control variables such as the level of economic openness and financial development, investment, government spending, and the expected level of education. Countries are grouped according to the level of corruption of the governments. The estimates from both Difference and System Generalized Method of Moments are obtained. The results consistently show a significant negative effect of exchange rate volatility on economic growth, which diminishes as the financial system develops. An important finding is that the effect of volatility is lower in high-corruption countries, which could be because they are used to dealing with the economic instability associated with low levels of governance and incorporate it as part of their costs.

Digitalization and tax evasion: the moderation effect of corruption

This study investigates the impact of digitalization adoption on tax evasion and tests the moderation effect of corruption on this relationship. The World Bank’s digitalization adoption index is used to measure the level of digitalization adoption, and the shadow economy is chosen as a proxy for tax evasion. The research is conducted based on a comprehensive dataset including data from 133 countries. The results indicate a negative and significant relationship between tax evasion and digitalization adoption of businesses and people, which indicates that digitalization helps to reduce tax evasion. Additional results show that digitalization is highly effective in reducing tax evasion in low-corruption countries compared to high-corruption countries. Our findings are potentially useful for policymakers in identifying digitalization as an effective tool for deterring financial crimes. Investment in technology can help in increasing tax revenues and allow governments to be more efficient in allocating resources.

Suspecting Foul Play When It Is Objectively There: The Association of Political Orientation With General and Partisan Conspiracy Beliefs as a Function of Corruption Levels

Recent research has showed that people with right-wing political orientations and political extremists are more likely to harbor conspiracy beliefs. Utilizing a multisite data set (23 countries, N > 20,000), we show that corruption moderates how political orientation predicts conspiracy beliefs. We found that (1) the difference between left- and right-wingers in terms of adopting a conspiracy mind-set is attenuated in countries with high corruption; and (2) left-wingers are more likely to believe left-wing conspiracy theories, and right-wingers are more likely to believe right-wing conspiracy theories in high corruption countries. Including quadratic effects of political orientation yielded the same results. We argue that this is because corruption increases perceived plausibility of conspiracies, and everyone across the political spectrum becomes similarly likely to adopt a conspiracy mentality. This heightened suspicion, however, is reflected on partisan conspiracy theories differently for left- and right-wingers, depending on their different understandings of outgroup.

Corruption and its diverse effect on credit risk: global evidence

Corruption has a complex relationship with economic growth. We have explored the impact of corruption on credit risk from a global perspective. The sample consists of 178 countries and covers 18 years that range from 2000 to 2017. Non-performing loan (NPL) is used as a proxy for credit risk and data regarding NPL is collected from the World Bank Database. Corruption scores are collected from the Transparency International reports. Panel regression results provide a positive association between corruption and credit risk for the global sample. Generalized Methods of Moments regression and robustness tests validate the findings. However, sub-sample analysis provides support for “grease the wheel” hypothesis for high corruption countries and indicates that corruption is beneficial in a weak form of governance and excessive regulatory pressure. This study advocate for the importance of strong governance mechanisms in high corruption countries that can minimize the impact of corruption on banking sector profitability and ensure economic development. Unlike past literature, we provide global evidence on the association between corruption and credit risk for the banking sector which allows generalizability.

Local corruption and dividend policy: Evidence from Vietnam

Some prior studies show that firms in high corruption countries tend to save more cash in order to make unofficial payments. This implies that managers in a corrupt environment are more flexible to use firms’ cash. Therefore, managers may take advantage of this opportunity to expropriate shareholders by restricting dividend policy. However, other studies find that shareholders may recognize this expropriation behavior and thus shareholders in countries of high corruption pressure managers to pay more dividends. In this paper, we investigate how local corruption influences dividend policy in Vietnam — an emerging market with weak corporate governance. Using a sample of 5,160 observations from firms listed in Vietnamese stock market from 2007 to 2017, we find that local corruption positively affects both the likelihood to pay dividends and payout ratio. Moreover, our research findings show that state ownership mitigates this effect and this effect is stronger in financial unconstrained firms.

Tax evasion, corruption and COVID-19 health risk exposure: a cross country analysis

PurposeThe purpose of this study is to examine the relationship between tax evasion and COVID-19 public health risk exposure in both high-corruption countries and low-corruption countries.Design/methodology/approachThis study uses cross-sectional data from 138 countries. Tax evasion is measured using the shadow economy size (light intensity approach) as calculated by (Medina and Schneider, 2018). The SolAbility COVID-19 public health risk exposure index (CPHRE) is used to measure COVID-19 health risk. Also, the corruption perception index from transparency international is used for measuring the level of corruption.FindingsThis study finds that the level of tax evasion is positively related to CPHRE. Also, the results revealed a positive relationship between corruption and CPHRE. Furthermore, this study examined the moderation effect of corruption. The results indicate that the positive relationship between tax evasion and public health risk exposure is significant in low-corruption countries, but it is insignificant in high-corruption countries. These results imply that the severity of corruption can increase COVID-19 health risk exposure more than tax evasion.Practical implicationsOur findings are alerting the policymakers for the negative noneconomic consequences of tax evasion and corruption. It provides evidence that tax evasion and corruption can increase CPHRE.Originality/valueAccording to the author’s knowledge, this is the first study that examines the relationship between tax evasion and COVID-19 risk and that tests the moderation effect of corruption.

Corruption and Firm Growth: Evidence from around the World

We empirically investigate the relationship between corruption and growth using a firm-level data set that is unique in scale, covering almost 88,000 firms across 141 economies in 2006-2020, with wide-ranging corruption experiences. The scale and detail of our data allow us to explore the corruption-growth relationship at a very local level, within industries in a relatively narrow geography. We report three empirical regularities. First, firms that make zero informal payments tend to grow slower than bribers. Second, this result is driven by non-bribers in high-corruption countries. Third, among bribers growth is decreasing in the amount of informal payments in both high- and low-corruption countries. We suggest that this set of results may be reconciled with a simple model in which endogenously determined higher bribe rates lead to lower growth, while non-bribers are often excluded entirely from growth opportunities in high-corruption settings.

Trading Up or Trading Down? How Home Country Corruption Affects Cross-Border R&D Investments

Prior research has demonstrated that corruption has largely negative effects on incoming international investments. What is less clear, however, is to what extent these negative effects are a product not of a host country’s absolute level of corruption, but of the relative distance to the home country’s degree of corruption. We define the Directional Corruption Distance (DCD) as the arithmetic difference between two countries’ corruption levels. Avoiding distorted FDI measures, we analyze the change in Research & Development Stock (RDS) representing more than 10,000 R&D centers of 500 technology-intensive MNCs taken from the Fortune 1000 list. Qualifying earlier research employing FDI as a dependent variable, we observe that countries of lower corruption are preferred destinations (Trading Up Hypothesis), but only under certain conditions. We further show that developed countries with lower degrees of corruption tend to prefer investments in other low-corruption countries (Comfort Hypothesis). High- corruption countries, conversely, do not exhibit this behavior and appear more open towards investment in other high-corruption countries (Familiarity Hypothesis). These findings underscore the influence of contextualizing variables in the origin of investments, and suggest extended research using firm-level field data to compensate for potential bias and flaws in FDI data.

Same Trade Openness Yet Different Environmental Quality — But Why?

This paper re-studies the relationship between trade openness and environmental pollution. Through the theoretical framework, there is a non-uniform effect of trade openness on environmental pollution. Utilizing four alternative measures of trade openness as threshold variables, this paper examines the effect of trade openness on environmental pollution. We adopt a regression with nonlinearity, in which our nonlinear model includes two regressions — a threshold model and an interaction-term model. Utilizing four alternative measures of trade openness, our threshold test shows a single-threshold effect on pollutant emissions, implying that there are two regimes: low- and high-corruption. Our empirical results show that for countries with high-corruption, increases in trade openness significantly reduce pollutants emissions whatever CO2 emissions or SO2 emissions, and the larger effects of trade openness on environmental quality. However, the impact of trade openness on pollution was not found in countries with low-corruption. This study suggests that further trade openness and reduced environmental degradation (i.e., decline in CO2 and SO2 emissions) are compatible rather than competing objectives, especially in high-corruption countries. Furthermore, our results also show that in low-corruption countries, the negative effects of income on CO2 emissions are statistically significant, but in high-corruption countries it is not so.

Beauty is in the Eye of the Beholder:How Corruption Distance Affects R&D Investment Flows

Prior research has demonstrated that corruption has largely negative effects on incoming international investments. What is less clear, however, is to what extent these negative effects are a product not of a host country’s absolute level of corruption, but of the relative distance to the home country’s degree of corruption. We define the Directional Corruption Distance (DCD) as the arithmetic difference between two countries’ corruption levels. Avoiding distorted FDI measures, we analyze Research & Development Inflows (RDIF), as they represent critical MNE activities. Our RDIF dataset portrays all published R&D centers of 500 technology-intensive MNCs taken from the Fortune 1000 list. In accordance with previous research employing FDI as a dependent variable, we observe that RDIF flows towards countries of lower corruption (Trading Up Hypothesis). We further show that developed countries with lower degrees of corruption tend to prefer investments in other low- corruption countries (Comfort Hypothesis). High-corruption countries, conversely, do not exhibit this behavior and appear more open towards RDIF in high-corruption countries (Familiarity Hypothesis). These findings underscore the influence of contextualizing variables in the origin of investments, and suggest extended research using firm-level field data to compensate for potential bias and flaws in FDI data.

Corruption and education in developing countries: The role of public vs. private funding of higher education

Corruption reduces the incentives to invest. This is also true for investments in human capital. The paper explains how enrollment in publicly funded higher education institutions affects years of schooling at different corruption levels. Using data from 88 developing countries, we first confirm that corruption negatively correlates with expected years of schooling. Second, we identify a joint effect of corruption and the type of higher education funding in a country: in low-corruption countries, the fraction of public higher education enrollment increases expected years of schooling, while it decreases in high-corruption countries.

Bribes and Firm Value- Evidence from Anti-Bribery Regulation

I exploit the passage of the U.K. Bribery Act 2010 as a shock to U.K. firms’ cost of doing business in order to study the effect of bribes on firm value. Around the Act’s passage, U.K. firms operating in high-corruption countries display a drop in value. However, their non-U.K. competitors in these countries exhibit an increase in value. U.K. firms respond to the Act by reducing the expansion of their network of subsidiaries into perceptively corrupt countries. Moreover, compared to their non-U.K. competitors, U.K. firms’ sales in such countries grow 12 percentage points slower and their merger and acquisition (M&A) activity declines. Taken together, I show that bribes facilitate doing business in certain countries. Imposing unilateral anti-bribery regulations on some firms benefits their unregulated competitors.

Education and trust

Contemporary research on trust has come to assume that education has a universal positive effect on trust. Using the survey item that has dominated the trust literature –‘whether one believes most people can be trusted or one can never be too careful’ – education is often found to be one of the strongest predictors of trust, more important than age, income, wealth, health or any another individual characteristic. Thus there are indeed reasons to believe that education sometimes increases the propensity to trust other people. However, this article argues that there are limits to the positive effect derived from education. Using the fifth wave of the World Values Survey, it is demonstrated that there is no positive effect from education on trust within the family, among friends or among persons living in one’s neighbourhood. In the latter case, a negative effect is found. It is also demonstrated that the positive effect on ‘generalized trust’ is largely a phenomenon found in low-corruption countries. The article demonstrates that in high-corruption countries, education decreases trust in other people – both generalized trust and trust in more proximate relationships.

Sustainability level, corruption and tax evasion: a cross-country analysis

PurposeThis paper aims to examine the relationship between the level of sustainability and tax evasion and test whether the level of corruption moderates such a relationship.Design/methodology/approachThe sample consists of 65 developed and developing countries. Tax evasion is measured using a macro indirect approach used by Schneideret al.(2010). The sustainability level and corruption variables are collected from The Global Competitiveness Report for 2012-2013.FindingsThis study finds that the level of tax evasion is negatively associated with the level of sustainability (overall score and social and environmental score) and the quality of infrastructure. When we distinguish between low- and high-corruption countries, we find that this negative association is significant for low-corruption countries and insignificant for high-corruption countries. These results imply that the level of corruption may reduce the tendency of individuals in a given state to accept and trust their government in general and comply with the tax rules in particular.Originality/valueOur empirical findings have policy implications for governments with high levels of tax evasion, as they highlight the importance of states’ engagements towards their citizens in reducing tax evasion.

Threshold effect of foreign direct investment on environmental degradation

The aim of this paper is to investigate the threshold effect of foreign direct investment (FDI) on environmental degradation. In empirical analysis, FDI and environmental degradation are jointly determined under the given threshold variable and other exogenous variables. Using carbon dioxide (CO2) emissions per capita as a proxy for environmental degradation, the results show that increasing FDI worsens CO2 emissions after a threshold level of corruption has been reached. Our results demonstrate that increasing FDI will increase CO2 emissions when the degree of corruptibility is relatively high. The study suggests that further FDI and improved environmental quality are competing rather than compatible objectives in high-corruption countries and are compatible rather than competing objectives in low-corruption countries. Higher trade liberalization in low-corruption countries could contribute to negative environmental consequences because of the increased output or economic activity which results from increased trade. The robustness estimation confirms the evidence that pollution and economic development increase together up to a certain income level, after which the trend reverses.

Can Trust Facilitate Bribery? Experimental Evidence from China, Italy, Japan, and The Netherlands

This article investigates the impact of trust on bribery. We measure trust with a survey question from the World Values Survey on whether respondents think others would take advantage of them if given the chance, and we observe bribery behavior in an experimental bribery game. The research was conducted in China and Italy, which have relatively high perceived-corruption levels, as well as in Japan and the Netherlands, which have relatively low perceived-corruption levels. In the bribery game, participants have the opportunity to bribe another participant to cheat to their advantage. We hypothesized that honoring bribing agreements depends on trust, the endorsement of such agreements is independent of trust. We find evidence that trust enables bribery in the two low-corruption countries, but no evidence that trust enables bribery in the two high-corruption countries. More specifically, trust predicts bribers' trustworthiness in honoring the bribery agreement once they enter into one. The results reveal a d...

The effects of trade liberalization on environmental degradation

This paper uses a threshold model to estimate the regime-specific marginal effect of trade liberalization and other determinants of environmental degradation in regimes with different levels of corruption. The results show that increasing trade liberalization leads to an increase in carbon dioxide (\(\mathrm{{CO}_{2}}\)) emissions in countries with a high level of corruption but to an decrease in countries with low corruption. A U-shaped relationship between \(\mathrm{{CO}_{2}}\) emissions and income exists in low-corruption countries but not in high-corruption countries. Our results also show that an increase in energy use per $1,000 in gross domestic product and fossil-fuel energy consumption will increase \(\mathrm{{CO}_{2}}\) emissions in any country. Moreover, increases in agricultural value and foreign direct investment can decrease environmental degradation in any country.