Does bribery sand or grease the wheels of firm level innovation: evidence from Latin American countries

This paper examines the effects of bribery on product and process innovation at the firm level in Latin American countries. We provide insights into the heterogeneous effects of bribery on the types of innovations across firms. Using the locality-sector average of bribe payments as a percentage of firm annual sales, we control for endogeneity bias, which is a recurring econometric problem in corruption-innovation studies. Overall, we find evidence to support the ‘sand the wheels’ hypothesis and argue that this negative effect is slightly higher in process innovation compared to product innovation. Using interaction terms to see the effects of bribery on different firm sizes and institutional structures, we find that bribery hurts firm innovation for micro and small firms, but not for large firms. The results also suggest that the negative effect of corruption on firm level innovation is stronger for firms in weak institutional environments than for firms in strong institutional settings. Practical interventions to promote strong institutional governance are not easy to arrange when corruption is endemic. Greater awareness of the extortionist environment of companies in these countries in the international community may bring pressures to bear for reform.