Exploring the link between corruption and innovation: the moderating role of institutional context and competitive pressure

This paper originates from the endless question about whether corruption “greases or sands the wheels” of growth. Focusing on innovation at the firm level, the question becomes whether corruption hampers or enhances innovation. To explore this link we use a panel data obtained merging two BEEPS surveys (2012-2014 and 2018-2019) with 3916 units located in 24 countries in Eastern Europe and Central Asia. We suggest that, to deeply understand the nexus between corruption and innovation, it is needed to go beyond the average effect. In fact, the intensity as well as the direction of this link is clearly affected by two factors: the institutional context, particularly the country’s level of control of corruption, and the market context or the degree of market competition that firms face. The empirical analysis leads to the following conclusions: • the link between corruption and innovation is reinforced by the poor quality of the institutions; • the link between corruption and innovation is non linearly connected with the degree of competition. Its intensity is particularly strong when firms face a high competitive pressure, coming from a multitude of even informal firms. This implies that in some scenarios, characterized by low control of corruption and high competitive pressure, corruption is a way to “grease the wheels” of the innovation; in other contexts, with high control of corruption and moderate competitiveness, the link becomes weak if not negative, resembling the “sanding the wheels” hypothesis. From a policy point of view, as in the countries under inspection the impact of corruption on innovation differs over different competitive markets and institutional characteristics, it follows that uniform restrictions are not appropriate.