Bribery and Its Effect on Innovation: When Bank Finance Matters

ABSTRACT In this paper, we examine the effect of bribery on innovation performance and whether bank finance serves as an effective channel of the impact. In doing so, we compute an innovation performance index for Vietnamese small and medium enterprises. We then conduct mediation analysis on the triad of bribery, bank finance and innovation performance using a large panel of almost 13,000 private manufacturing firms in Vietnam from 2007 to 2015. Empirical results indicate a positive effect of bribery on firm innovation and that firm borrowing significantly mediates this relationship. Specifically, bribery increases firm borrowing from banks, which in turn enhances innovation. We then enrich our study with a provincial level dataset that covers 63 provinces in Vietnam over the 2010–2019 period. We find that at the provincial level, bribery turns out to hinder technological improvement instead. The overall findings imply that bribery creates a negative externality that distorts the allocation of resources. While bribery may be beneficial to firms that are engaged in undertaking it, the social cost it imposes on society outweighs any private benefits it generates. The results convey important policy implications for policymakers wishing to promote a healthy innovation culture and a sustainable economic development path for society.