Firm bribery and credit access: evidence from Indian SMEs

Abstract

This study investigates the effect of paying bribes on access to credit for small, and medium enterprises (SMEs). Bribery is variously portrayed in the literature as greasing the wheel (helping) or sand in the wheel (impeding) when applying for credit leaves the issue unresolved. Using The World Bank Enterprise Surveys of SME data, an answer for India emerges using an instrumental variable probit model. SME bribery is detrimental to accessing credit and more so for firms that have been in business for many years and operating on a small scale. There are supply and demand side forces involved, culminating in differing size effect reactions. From a supply side perspective, when corruption is high, financial institutions find it harder to control borrower risk and recover loans. In that case, financial institutions reduce their lending to SMEs, which mostly belong to a high-risk category. Unlike large firms, SMEs paying bribes to grease the wheel are drawn to the informal sector, avoiding attention from officials. Where SMEs pay bribes in the formal sector it is noticed and is likely to increase the probability that other parties will also demand payments. The demand side argument regards bribes as a tax, increasing the cost of loans to the SMEs. Consequently, making significant bribes decreases these SMEs' profitability. Less profitable SMEs may not obtain access to credit. From a policy perspective, anti-corruption measures are vital for developing SMEs. Generalising these findings to other emerging economies suggests potentially significant welfare gains.

The Causal Effect of Access to Finance on Productivity of Small and Medium Enterprises in Vietnam

“…Another important factor is bribery that may take place during the lending process through bribing bank officials [48]. It was shown that bribery plays a crucial role in determining the ability of firms to access to financial services [49][50][51]. The previous papers also included sector and export as dummy variables to test whether there is a difference in accessibility to finance between export and non-export enterprises.…”

Corruption and SME growth: the roles of institutional networking and financial slack

“…Entrepreneurs could receive special and beneficial treatment by engaging in corruption, such as bank loans, permit approvals, direct contracts and regulation favours (Acquaah, 2007;Dheer, 2017;Wellalage et al, 2019aWellalage et al, , 2019b. Further, entrepreneurs in developing countries have limited alternate opportunities to earn income (Ahsan et al, 2020), which may compel them to engage in bribery and other forms of corruption (e.g., circumventing tax and business laws) to succeed.…”

“…However, owners/CEOs of SMEs need to have sufficient financial resources to engage institutional ties and develop good relationships with them, as such connections are often developed by socialising in the same circles (Barton, 1985;Davis et al, 2003;Maclean et al, 2010Maclean et al, , 2017. The challenge of accessing credit in environments where corruption is prevalent (Wellalage et al, 2019a) makes financial slack even more valuable. Next, we explain the hypothesised relationships among the variables in the model.…”

“…As entrepreneurship plays a key role in economic development and wealth creation (Baumol, 1990), this issue has received growing attention in the entrepreneurship literature. Researchers have predominantly utilised macro-level data to examine the relationship between corruption and entrepreneurial activities (Anokhin and Schulze, 2009;Dreher and Gassebner, 2013;Mohamadi et al, 2017;Wellalage et al, 2019aWellalage et al, , 2019b. Interestingly, these studies present mixed findings.…”

Credit constraints, labor productivity, and the role of regional institutions: Evidence from manufacturing firms in Europe

“…Besides firm size, credit rationing and its negative returns on firms' productivity may be related to the context in which firms are located and operate. The literature has widely underlined how national macroeconomic conditions, the development and regulation of the national financial sector, and the quality of national institutions are fundamental factors influencing both firms' access to credit (Andrieu et al, 2018; Canton et al, 2013; Hewa Wellalage et al, 2019) and performance (Aidis, 2005; Bowen & De Clercq, 2008; Dollar et al, 2005; Dutta & Sobel, 2016). By contrast, how regional institutions influence firms' productivity, in general, and the credit constraints–productivity relationship, in particular, has received limited attention.…”