Greasing the wheels? The impact of regulations and corruption on firm entry

Abstract

This paper investigates the question of whether corruption might 'grease the wheels' of an economy. We investigate whether and to what extent the impact of regulations on entrepreneurship is dependent on corruption. We first test whether regulations robustly deter firm entry into markets. Our results show that the existence of a larger number of procedures required to start a business, as well as larger minimum capital requirements are detrimental to entrepreneurship. Second, we test whether corruption reduces the negative impact of regulations on entrepreneurship in highly regulated economies. Our empirical analysis, covering a maximum of 43 countries over the [2003][2004][2005] period, shows that corruption facilitates firm entry in highly regulated economies. For example, the 'greasing' effect of corruption kicks in at around 50 days required to start a new business. Our results thus provide support for the 'grease the wheels' hypothesis.

Institutional factors, opportunity entrepreneurship and economic growth: Panel data evidence

“…Klapper et al (2006) and Méon and Weill (2010) find that the effect of inefficient institutions is higher when countries have a high level of corruption. Dreher and Gassebner (2013) find that corruption reduces the dynamic of entrepreneurial entry. Thus, countries with higher levels of corruption may affect the development of entrepreneurship negatively (Akimova, 2002).…”

Corruption and political stability: Does the youth bulge matter?

“…Some provide support for the "greasing" hypothesis, in which corruption helps moderate the negative effects of dysfunctional regulations and low-quality institutions (Leff, 1964;Huntington, 1968;Dreher and Gassebner, 2013;Méon and Weill, 2010). According to the World Bank (private) firm-level survey database, approximately 20% of firms around the world are expected to give gifts to public 1 In this study, we follow Bjorvatn and Farzanegan (2015) and use "internal conflict" and "political instability" interchangeably.…”

Entrepreneurship and its link to corruption: Assessment with the most recent world and country-group data

“…This means that the intangible asset that is entrepreneurship is related to tangibles that are GDP, ICT use and quantity of education besides an intangible bad represented by CPI. This says that the enhancement of entrepreneurship accounts for education and use of information technologies with the importance of financial capital most of the time but a reduced level of corruption is necessary like it is confirmed by the findings of Taslim (1994) and Dreher and Gassebner (2013). Moreover, Szyliowicz and Wadhwani (2007) add that fighting corruption has a positive effect as it allows entrepreneurs to access new markets and makes the procedures easier and faster.…”

“…The results showed that entrepreneurship is subject to many factors affected by corruption which negatively decreases the entrepreneurial initiatives. Dreher and Gassebner (2013) study whether corruption is a positive factor to economy. For this purpose they investigate the impact of regulations on entrepreneurship and to which extent corruption participates into smoothing the procedures.…”