The roles of foreign and domestic ownership in the corruption–firm innovation nexus

Abstract

Previous literature has shown the detrimental impact of corruption on innovation. Conversely, the grease‐the‐wheel effect, in bribing fuelling firm innovation, has found some empirical support too. Past studies show that foreign‐owned firms largely outperform domestic firms in innovation activities. However, little is known about how corruption in developing countries might shape the advantages of foreign‐owned firms to innovate. We explored whether bribery, as an institutional dysfunctionality, is differently associated with innovation in the context of foreign owned versus domestically owned firms that operate in overall low research and development intensive economies and engage in exporting. By applying recursive bivariate probit regression, we investigated the link between bribery and innovation engagement among 4118 domestically and foreign‐owned exporting firms from 34 developing countries, using data from the World Bank Enterprise Surveys and other databases. We find evidence on the grease‐the‐wheel effect so that bribery has a stimulating effect on innovation among domestically as well as foreign‐owned exporting firms. These findings underscore the importance for developing countries of finding institutional and policy solutions to coordination failure in combatting corruption.