“GREASING” OR “SANDING-THE-WHEELS”? AN EMPIRICAL ASSESSMENT ON THE IMPACT OF CORRUPTION ON FIRM INNOVATION IN CHINA

Abstract: Corruption is generally considered to affect firm innovation negatively. Yet recent scholarship is indicating that corruption may yield positive effects on innovation practices by removing certain barriers associated with starting up or operating businesses. The differing perspectives on the impact of corruption on firm innovation have engendered two contrasting hypotheses: the ‘sand-the-wheels’ and ‘grease-the-wheels’ hypotheses. The former contends that corruption is detrimental to innovation whereas the latter argues that it is favourable to innovation. Using firm-level data from the World Bank Enterprise Survey 2012, this study examines the impact of corruption (bribery) on innovation activities (new products and process) in the context of the Chinese business environment to test these hypotheses. A linear probability model (LPM) is employed and tested against a sample of 2,700 privately-owned Chinese firms. The results suggest that bribery has a positive impact on both new product and process innovation. Firm characteristics such as license, R&D, equipment, firm age, ownership, and ICT technologies were also found to have a significant effect on the innovation activities of the firms. The findings provide support for the grease-the-wheels hypothesis in the short-term, but the long-term effect may be different. In the short-term, this thesis indicates that corruption can accelerate innovation for those who can afford it by facilitating the process of obtaining licenses and permits to operate the business.