Easing Credit Constraints on Investment in India: Does Corruption Help?

Corporate investment is determined by a combination of factors that are associated with the financial structure and firm-specific characteristics, as well as the institutional environment in the country where the firm is located. Although a lot of studies demonstrate the importance of firm-specific characteristics and capital structure, the institutional environment remains an important yet less studied factor in explaining the investment behaviour of firms. This study examines how institutional quality in the form of prevalent corruption influences corporate investment in India. The results confirm the investment-enhancing role of corruption via promoting credit accessibility. This study also explores a non-linear relationship between corruption and firms’ investment to examine whether corruption ‘greases the wheels’ of firms’ investment even at its higher level. JEL: D20, D22, C33