How does bribery affect a firm’s future growth? Empirical evidence from transition economies

Although economists have long studied the impact of bribery on firms’ development, the debate continues as to whether bribery ‘greases’ or ‘sands’ the growth of businesses. For this investigation, we acquired data from the Business Environment and Enterprise Survey conducted by the World Bank; this panel data include firm-level information, every three years from 2002 to 2008, in transition economies in Central Asia and Eastern Europe. Then, we estimated the longitudinal impact of bribery upon firms’ development over a period of time. We found that bribing firms were more likely to bribe again three years later. In addition, we found that bribery could increase a firm’s output and employment growth significantly, while simultaneously deterring that firms’ labour productivity and innovation. After grouping the countries based on their income level, we found that significant positive impacts of bribery on output and employment only exist in developed countries, while its negative impacts on productivity and innovation are consistent in all types of countries. Interestingly, bribery can only significantly decrease a firm’s time spent on waiting for resource connections in developed countries. When we extended our time horizon from three to six years, the significant longitudinal impacts of bribery no longer lingered.