Corruption, Transaction Costs and Innovation in Africa

This paper examines the relationship between corruption and transaction costs, as measured by asset specificity and innovation in Africa. We hypothesize that in the context of developing countries in Africa, corruption is significantly associated with innovation, and that this relationship is mediated by transaction costs, including physical asset specificity and human asset specificity. We test our hypotheses by means of a multiple mediation model. We use the product-of-coefficients approach and bootstrapping techniques to estimate firm-level data from the World Bank Enterprise Survey and Innovation Follow-up Survey for five countries in Sub-Saharan Africa. We find that corruption is positively associated with innovation, and that asset specificity positively mediates this relationship. We conclude that the positive relation between corruption and innovation offers support to the “grease-the-wheels” hypothesis. Furthermore, transaction costs involving physical asset specificity increase the likelihood of innovation in a business environment characterised by corruption, an indicator of poorly functioning institutions. Hence, policies focusing on strengthening institutions are likely to be beneficial for controlling corruption and stimulating innovation Lastly, policies pertaining to tax incentives related to physical asset investments are crucial for enhancing innovation.