Local Corruption and Corporate Investment: Political Catering or Innovation Driven?

ABSTRACT This study investigates how local corruption influences corporate investment. We propose that corruption causes firms to pay more attention to nonmarket strategies and thus alter corporate investment choices. Empirical tests show that firms headquartered in more corrupt regions invest more in fixed assets and less in research and development (R&D) activities. Moreover, the relation between corruption and corporate investment choices is stronger for firms with lower state‐owned equity and institutional ownership. Further analysis reveals that corruption primarily affects firms' investment orientation by enhancing their political catering motivations. Overall, the findings reveal the unique logic of corporate investment decision‐making in weak institutional environments and provide an explanation for the lack of innovation in firms from the view of regional corruption.