Corruption, Bureaucracy and Firm Productivity in Africa

Abstract

This paper estimates the impact of corruption and poor bureaucratic quality on firm productivity for a unique dataset with firm-specific data of more than 900 firms over 12 years for Ghana, Kenya and Tanzania. We first discuss why poor bureaucratic quality and, especially, corruption are expected to have negative impacts on firm productivity. We then employ Data Envelopment Analysis to estimate firm productivity and pooled OLS and Tobit regression analysis to estimate the effects of corruption and bureaucratic quality on firm productivity. We find that less productive firms are more likely to engage in corrupt activities; both poor bureaucratic quality and corruption reduce firm productivity; and corruption has a greater negative impact on productivity. . We would like to thank the participants in the 2009 Midwest Economic Association Meetings and an anonymous referee for their helpful comments. We are responsible for any remaining errors.

New Evidence on Why Many African Firms Perform Poorly

“…These results are highly significant, at the 1 per cent level of statistical significance. As discussed previously, capital‐intensive firms may lack the comparative advantage needed to produce labor‐intensive products in developing countries; furthermore, in the volatile environments of developing countries, capital‐intensive firms may be less adaptable and hence, less efficient (Oczkowski and Sharma, ; Faruq et al , ). The finding about foreign ownership suggests that foreign firms can enhance efficiency by bringing in new capital, expertise and resources.…”

“…The effects of corruption and legal system on firm performance also seems to be somewhat unique for African countries, at least anecdotally. There seems to be some evidence that corruption in African countries tend to be ‘decentralized’ and takes the form of random bribe demands and threats by government officials, which may have harmful consequences (Gyimah‐Brempong, ; McArthur and Teal, ; Faruq et al , ). In comparison, corruption is regarded as more ‘centralized’ in some developing countries outside Africa, where bribe payments are made to government bureaucrats in order to expedite the delivery of a public service.…”

The Impacts of Corruption on Firm Performance: Some Lessons From 40 African Countries

“…Fisman and Svensson (2007) similarly find that a one percentage point increase in the bribery rate is associated with a reduction in firm growth of three percentage points. Again in the African context, Faruq and Webb (2013) find that less productive firms are more likely to engage in payments to corrupt public officials and that corruption reduces firm productivity. There are similar findings from other parts of the developing and developed world.…”

“…It is similarly the case that numerous country-level studies provide evidence at the macrolevel that countries with a high level of corruption display relatively lower levels of firm performance (Faruq and Webb, 2013;Mauro, 1995;De Rosa et al, 2010;Gaviria, 2002;Lavallée and Roubaud, 2011;Teal and McArthur, 2002). As Myrdal (1968) explains, corrupt civil servants cause delays that would not otherwise occur simply to provide themselves with the opportunity to receive a corrupt payment to speed up the process.…”

Investment Climate Constraints as Determinants of Political Tie Intensity in Emerging Countries: Evidence from Foreign Firms in Ghana

“…Being very common in most countries on the continent, corruption seems to have become an institution of its own (van den Bersselaar and Decker 2011), with dire consequences for firms. Bureaucratic red-tape and slow public sector systems can lead to delays in shipments and approvals, problems in the administration of taxes and licenses, and increased time costs for managers, thereby decreasing efficiency (Faruq et al 2013). Red-tape also exacerbates the problem of corruption, as individuals and firms are expected to make informal payments in order to receive preferential and expedite treatment.…”