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The Effect of Corruption on Investment Growth: Evidence from Firms in Latin America, Sub-Saharan Africa and Transition Countries

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Author Info
Elizabeth Asiedu (Department of Economics, The University of Kansas)
James Freeman (Department of Economics, Wheaton College)
Abstract

Many of the empirical studies that analyze the impact of corruption on investment have three common features: they employ aggregate (country-level) data on investment, corruption is measured at the country-level, and data for countries from several regions are pooled together. This paper uses firm-level data on investment and measures corruption at the firm and country-level, and allows the effect of corruption to vary by region. Our dependent variable is firms’ investment growth and we employ six measures of corruption from four different sources: two firm-level measures and four country-level measures. We find that the effect of corruption on investments varies significantly across regions: corruption has a negative and significant effect on investment growth for firms in Transition countries but has no significant impact for firms in Latin America and Sub-Saharan Africa. Furthermore, among the variables included in the regressions (firm size, firm ownership, trade orientation, industry, GDP growth, inflation and openness to trade) corruption is the most important determinant of investment growth for Transition countries.

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Paper provided by University of Kansas, Department of Economics in its series WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS with number 200802.

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Length: 50 pages
Date of creation: May 2008
Date of revision:
Handle: RePEc:kan:wpaper:200802

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Related research
Keywords: Bribery; Corruption; Firm; Investment; Latin America and Caribbean; Sub-Saharan Africa; Transition Countries.;

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Find related papers by JEL classification:
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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  1. Paolo Mauro, 1996. "The Effects of Corruption on Growth, Investment, and Government Expenditure," IMF Working Papers 96/98, International Monetary Fund.
  2. Edgardo Campos, J. & Lien, Donald & Pradhan, Sanjay, 1999. "The Impact of Corruption on Investment: Predictability Matters," World Development, Elsevier, vol. 27(6), pages 1059-1067, June. [Downloadable!] (restricted)
  3. Garrett, Thomas A., 2003. "Aggregated versus disaggregated data in regression analysis: implications for inference," Economics Letters, Elsevier, vol. 81(1), pages 61-65, October. [Downloadable!] (restricted)
  4. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August. [Downloadable!] (restricted)
  5. Andrew B. Abel & Janice C. Eberly, 1995. "Optimal Investment with Costly Reversibility," NBER Working Papers 5091, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Bose, Gautam, 2004. "Bureaucratic delays and bribe-taking," Journal of Economic Behavior & Organization, Elsevier, vol. 54(3), pages 313-320, July. [Downloadable!] (restricted)
  7. Abel, Andrew B, 1983. "Optimal Investment under Uncertainty," American Economic Review, American Economic Association, vol. 73(1), pages 228-33, March.
  8. Guriev, Sergei, 2004. "Red tape and corruption," Journal of Development Economics, Elsevier, vol. 73(2), pages 489-504, April. [Downloadable!] (restricted)
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  9. Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," NBER Working Papers 5227, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Lorenzo Pellegrini & Reyer Gerlagh, 2004. "Corruption's Effect on Growth and its Transmission Channels," Kyklos, Blackwell Publishing, vol. 57(3), pages 429-456, 08. [Downloadable!] (restricted)
  11. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2005. "Measuring Governance Using Cross-Country Perceptions Data," MPRA Paper 8219, University Library of Munich, Germany. [Downloadable!]
  12. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February. [Downloadable!] (restricted)
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  13. Omar Azfar & Peter Murrell, 2005. "Identifying Reticent Respondents: Assessing the Quality of Survey Data on Corruption and Values," Electronic Working Papers 05-001, University of Maryland, Department of Economics. [Downloadable!]
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  14. Thorsten Beck & Asli Demirgüç-Kunt & Vojislav Maksimovic, 2005. "Financial and Legal Constraints to Growth: Does Firm Size Matter?," Journal of Finance, American Finance Association, vol. 60(1), pages 137-177, 02. [Downloadable!] (restricted)
  15. Beata K. Smarzynska & Shang-Jin Wei, 2002. "Corruption and Cross-Border Investment: Firm-Level Evidence," William Davidson Institute Working Papers Series 494, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  16. Gaviria, Alejandro, 2002. "Assessing the effects of corruption and crime on firm performance: evidence from Latin America," Emerging Markets Review, Elsevier, vol. 3(3), pages 245-268, September. [Downloadable!] (restricted)
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  17. L. Cameron & A. Chaudhuri & N. Erkal & L. Gangadharan, 2005. "Do Attitudes Towards Corruption Differ Across Cultures? Experimental Evidence from Australia, India, Indonesia andSingapore," Department of Economics - Working Papers Series 943, The University of Melbourne. [Downloadable!]
  18. John McArthur & Francis Teal, 2004. "Corruption and Firm Performance in Africa," Development and Comp Systems 0409015, EconWPA. [Downloadable!]
    Other versions:
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