Are Innovating Firms Victims or Perpetrators? Tax Evasion, Bribe Payments, and the Role of External Finance in Developing Countries

57 Pages Posted: 20 Apr 2016  

Meghana Ayyagari

George Washington University - School of Business

Asli Demirgüç-Kunt

World Bank - Development Research Group; World Bank

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business

Date Written: July 1, 2010

Abstract

This paper investigates corruption and tax evasion and their firm-level determinants across 25,000 firms in 57 countries, a large fraction of which are small and medium enterprises in developing countries. Firms that pay more bribes also evade more taxes. Corruption acts as a tax on innovation, particularly that of small and young firms. Innovating firms pay a larger percentage of their revenues in bribes to government officials than non-innovating firms. They do not, however, pay more protection money to private parties than other firms. Comparing the magnitudes of bribes and taxes evaded, innovating firms and firms that use formal finance are more likely to be net victims. The findings point to the challenges facing innovators in developing countries and the role of banks in curbing corruption and tax evasion.

Keywords: Access to Finance, Taxation & Subsidies, Public Sector Corruption & Anticorruption Measures, Debt Markets, Public Sector Economics

Suggested Citation

Ayyagari, Meghana and Demirgüç-Kunt, Asli and Maksimovic, Vojislav, Are Innovating Firms Victims or Perpetrators? Tax Evasion, Bribe Payments, and the Role of External Finance in Developing Countries (July 1, 2010). World Bank Policy Research Working Paper No. 5389. Available at SSRN: https://ssrn.com/abstract=1650999

Meghana Ayyagari (Contact Author)

George Washington University - School of Business ( email )

Washington, DC 20052
United States

Asli Demirgüç-Kunt

World Bank - Development Research Group ( email )

United States
202-473-7479 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/ademirguckunt/

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business ( email )

Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2125 (Phone)
301-314-9157 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/vmax/

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