Bribery, a Shortsighted Alternative to Investments

Corruption is a widespread phenomenon worldwide, and many studies highlight its negative consequences for the economic growth of a country. Researchers have also focused on its implications at the firm-level, providing insights into the micro mechanisms by which corruption affects firm outcomes. An open issue is whether bribing, a particular type of corruption, undermines the long-term potential related to investing in fixed assets.

A paper by Bocconi Department of Management and Technology's Alfonso Gambardella, EMLyon's Addis Birhanu, and IESE's Giovanni Valentini (Bribery and Investment: Firm-Level Evidence from Africa and Latin America, in Strategic Management Journal, Volume 37, Issue 9, doi: 10.1002/smj.2431) finds a negative effect of bribes on investments. It then explores four mechanisms to understand what drives this behavior.

The authors analyzed data from two World Bank surveys conducted in 2005–2006 and 2009–2010 on firms in 13 countries in Africa and Latin America. "It was Addis who had the idea to explore this issue," Gambardella says "largely because of her strive to improve firm performance in her country, Ethiopia". Having found a negative effect of bribes on investments, the authors studied some of the common explanations for the trade-off between bribing and investment: bribe payments may drain financial resources for investment; firms that undertake fixed investments may not bribe because fixed assets make them less flexible and more vulnerable to future bribes; or less efficient firms bribe rather than investing because their investments are not productive. They find that it is the short-term orientation of firms that induces them to bribe instead of investing in fixed assets.

"Bribery must have some advantage for the firms, otherwise they would not go for it" Gambardella explains. So, from the social point of view, a firm opts for bribing because of short-term oriented decisions. "It is like seeking a job via nepotism or education. Nepotism makes it likely to find a job in the short term. However, the solid skills generated by education raise the odds of finding better jobs in the future." Firms going for bribing are not necessary those that are less efficient or export the less, but they invest less in long-term assets.

According to Gambardella, one conclusion of this study is that, besides the ethical problem, there is an underestimated downside of bribery on the long-term perspective of firms. "We often associate corruption to inefficient firms. But we find that the big economic problem of corruption – which is likely to apply to Italy as well - is that it favors short-term firm-specific benefits at the expense of the solid long-term investments that produce long-term advantages and that underpin the growth of firms and economies".