Heterogeneous Bribe Payments and Firms’ Performance in Developing Countries

This paper reexamines the relationship between bribery and firms’ performance with a recognition that not all illegal payments are equal over the business life cycle. Some payments are in effect more likely to occur during firms’ establishment or expansion, such as when obtaining an operating license, a construction permit or a connection to public utilities, while others tend to occur during regular activities, for instance when dealing with tax or customs officials. Using data from the World Bank’s Entreprise Surveys of more than 46,000 firms across 69 developing countries, and an empirical model that accounts for both endogeneity of and self-selection into bribery, the results suggest that corruption greases the wheels of commerce for infant and expanding firms, as it is associated with increased productivity, investment, and likelihood to enter export markets. However, for firms in their regular activities, corruption acts more like sand in the wheels, as it harms performance. This heterogeneous nature of illegal payments along the business life cycle calls for differentiated and targeted policies aiming at curbing corruption in developing countries.