Greasing the Wheels of Change: Bribery, Institutions, and New Product Introductions in Emerging Markets

Abstract

Despite the consensus on the negative country-level implications of corruption, its consequences for firms are less understood. This study examines the effect of bribery on the innovative performance of firms in emerging markets as reflected by new product introductions. I argue that bribery may help innovators in these markets to introduce new products by overcoming bureaucratic obstacles, compensating for the lack of kinship or political affiliations, and hedging against political risk. I also propose that the relationship between firm bribery and new product introduction will be negatively moderated (i.e., weakened) by the quality of the formal and informal institutions in place. Employing data from over 6,000 firms in 30 emerging markets and a wide range of empirical tests, my results support these hypotheses. These findings extend transaction costs economics by showing that bureaucratic obstacles and uncertainty can drive firms into illegal cost minimization strategies. Moreover, they augment institutional theory by expounding upon the ways that norms and informal practices moderate the efficiency of firm strategies in emerging markets.

Keywords: Bribery; Innovation; Institutions; Trust; Control of corruption

JEL Classification: D73, O14, O31, H11, H25