Corruption and Innovation

Abstract

While one strand of research views corruption as a boost to economic growth (e.g., Leff, 1964), the other views it as a hindrance (e.g., Mauro, 1995). Most of the “hindrance” literature relies on the linkage of corruption to growth through its affect on investment.Méon and Sekkat (2005) find that corruption affects growth independently from its impact on investment in economies where there are weak governance structures. There is a need therefore in this context to study channels of economic growth that are affected by corruption. This paper deals with one such channel, namely innovative activity. This paper is the first in a way that it tries to merge two distinct fields of economics of innovation and public choice.

Innovation is considered crucial for economic growth (mainly from the technology-gap approach, see Fagerberg, 1994). Innovative activities might get affected by corruption due to lack of resources or lack of trust in institutions. A related view is suggested by Shleifer and Vishny (1993) that corrupt firms would often report having advanced technologies, even though they are not needed necessarily. This would mean that the amount of innovative activity seems large only due to the presence of corruption. This issue is of utmost importance in the context of less developed countries (LDCs) that have to cope with socio-political-economic instabilities and bureaucratic pressures and yet at the same time have to keep up with economic growth.