The Corruption–Innovation Nexus: Evidence from Developing Economies

For the majority of developing economies, corruption is a widespread phenomenon because of weak institutional settings. Corruption has been widely recognized as unfavorable for economic growth as it exploits resources and inhibits foreign investment. On the other hand, developing economies advocate firms’ innovative behaviors as a significant driver for economic growth. As such, it is of great concern to study the relationship between corruption and innovation. Economic theories have been divided regarding this nexus. Some argue for a “grease-the-wheels” hypothesis: corruption helps reduce the uncertainty associated with an innovative decision. In contrast, others argue for a “sand-the-wheels” hypothesis when corruption hampers firm innovation with higher costs. This chapter explores the effect of petty corruption on firms’ innovative behaviors in developing Asian economies using the data from the World Bank Enterprise Survey. An empirical strategy of regression analysis and instrumental variables technique is employed to account for endogeneity. The model also considers the effect of other factors such as training activities or holding internationally recognized standards. This chapter contributes both in academic and practical terms when it presents empirical evidence to the current debate and reminds policymakers to consider more factors regarding economic policies.