The Effect of Bribery on Firm Innovation in Latin America

Abstract

This paper uses firm-level data from the 2010 World Bank Enterprise Surveys to measure the impact of corruption on firm innovation in Latin American economies. Specifically, the paper studies the effects of bribery on the introduction of new or significantly improved goods or services within the last 3 fiscal years. Moreover, this research asserts the presence of three mechanisms, unique to the region’s socioeconomic structure which is dominated by larger firms, that tie bribery to firm innovation. First, bribery allows the ability of larger monopolizing groups to exploit their influence over smaller firms and prevent the latter from competing and innovating at their level. Second, bribery is embedded in virtually every aspect of the export business and severely limits the ability of smaller firms to partake in the exporting necessary to innovate at the same rates as the larger firms. Third, bribery is a key component of close relationships with government officials in the region, who in turn provide protection and grant larger firms a continued monopolization over innovation. Empirically speaking, the findings of this paper support a positive correlation between bribery and firm innovation in the region, as well as support for each of the three mechanisms.