Corruption and Corporate Innovation

Abstract

We examine whether political corruption impedes innovation. Using a comprehensive sample of U.S. firms, we find that corruption has a substantial, negative relation with the quantity and quality of innovation. These results are robust to using various fixed effects, proxies for corruption and innovation, and subsamples. To establish causality, we employ 2 instruments for corruption: local ethnic diversity and the corruption of the state a firm’s founder grew up in. Corruption appears to reduce innovation output both on average and for the most innovative firms. Overall, this evidence is consistent with the notion that corruption reduces social welfare by impeding innovation.

The Impact of Environmental Uncertainty on Corporate Innovation: Empirical Evidence from an Emerging Economy

“…The existing literature includes a significant amount of research on the motivation of corporate technological innovation. Focusing on the external influencing factors of corporate technological innovation, such as financial policy, industrial policy and industry characteristics [ 2 , 3 , 4 ], and internal influencing factors, such as corporate governance structure, managers’ shareholding ratio, executive incentive, corporation size, and nature of equity [ 5 , 6 , 7 ], a great deal of results have been achieved. However, most of the existing literature has not considered the risks faced by corporations and environmental uncertainty.…”

U.S. Political Corruption and Loan Pricing

“…Thus, our ordinary least squares (OLS) estimates are potentially biased due to endogeneity because the level of state corruption may be a determinant in a firm's choice of headquarters location, which may in turn affect financial and managerial decisions (e.g., Smith 2016). To address this possibility and to obtain a purer effect of the corruption variable on loan spreads, we conduct a two-stage least squares (2SLS) regression analysis (as in Faulkender and Petersen 2006;An and Chan 2008) with isolation capital similar to that of Smith (2016) and Nguyen, Phan, and Simpson (2018), and state-level ethnic diversity as used in Gupta, Raman, and Shang (2018) and Ellis, Smith, and White (2019) as our key instrumental variables (IVs). There is justification for choosing these two IVs.…”

“…Standard errors are clustered at the state level (e.g., Cameron and Miller 2015;Petersen 2009). In column 1, we use a two-stage least squares (2SLS) estimation with isolation capital (Smith 2016;Nguyen, Phan, and Simpson 2018) and ethnic diversity (Ellis, Smith, and White 2019;Gupta, Raman, and Shang 2018) as instrumental variables (IVs). Stage 1 results are not reported for brevity but are available upon request.…”

Financial reporting and corporate innovation: a review of the international literature

“…The authors did not test whether financial reporting quality mediates the positive relationship between social capital and innovation. Ellis et al (2020) investigate the effect of state-level corruption in the US on the quantity and quality of corporate innovation. Their theoretical premise of a negative relation between local corruption and innovation is based on the costly corruption hypothesis.…”