Corruption: A catalyst for economic growth? - The case of India

Abstract: This thesis aims to investigate and evaluate the role of institutional quality in fostering innovation in developing countries, specifically focusing on corruption's impact on product and process innovation at the firm level in India. The study utilizes a probit model with and without fixed effects applied to data from the World Bank Enterprise Survey (WBES) for both 2014 and 2022, individually. The separate tests serve as the foundation for analyzing what has transpired during the research period. The findings reveal contrasting effects of bribery on innovation between the two time periods. In 2014, bribery exhibits a negative impact, hindering innovation. However, in 2022, bribery displays a positive impact, facilitating innovation. Notably, the relationship between corruption and innovation has been significantly and adversely influenced by the Covid-19 pandemic. The pre-Covid data aligns with the ‘sand the wheels’ theory, suggesting that corruption impedes innovation. Conversely, the survey data collected from the period showed opposing results, indicating an outcome consistent with the ‘grease the wheels’ theory, where corruption aids innovation. When running a simplified fixed effects model, the results were consistent with previous regressions, but showed insignificance. The study contributes to existing research regarding the dynamic relationship between corruption and firm-level innovation in India. Further research could employ recent data and investigate the causal link between the effects of the covid-19 pandemic and relationship between corruption and innovation in India.