Bribery, global value chain decisions, and institutional constraints: Evidence from a cross-country firm-level data

We employ a multi-country firm-level data covering 109 developing countries during the 2005–2017 period to investigate the effect of bribery on the global value chain (GVC) decision for firms and the moderating roles of firm size and institutional constraints in such relationships. In this research, we treat the GVC participation as a strategic choice and GVC firms are defined as two-way traders who export and import simultaneously and hold a quality certification. We also distinguish GVC decisions into GVC participation decisions that firms decide to carry out GVC activities and GVC switching decisions that firms decide to switch from non-GVC to GVC status. Institutional constraints are firms' self-ration on corruption, political stability, court, and customs and trade regulations. Our empirical findings support the “greasing-the-wheels-of-GVC” hypothesis that greasing bribery positively influences the GVC participation and switching probability. Paying greasing bribes only improves the small and medium-sized firms’ probability of becoming GVC actors if there is no institutional constraint. With sufficiently strong bargaining power, large-sized firms grasp more benefits from bribe payments even in the weak and poor institutional system, thus becoming a part of global supply chains. Finally, when we control the endogeneity, the impacts of greasing become more sizable and we find evidence for the “sanding-the-wheels-of-GVC” hypothesis of rent-seeking bribery.