Entrepreneurship, innovation, and corruption

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Abstract

Efforts to control corruption increase levels of trust in the ability of the state and market institutions to reliably and impartially enforce law and the rules of trade. Such trust facilitates the development of arms-length trade and the coordination of complex economic activities. We posit that better control of corruption will also be associated with rising levels of innovation and entrepreneurship. Absent such trust, however, monitoring and other transactions cost should restrict the scale and scope of trade and thus, hamper productivity and investment in innovation and entrepreneurship. Longitudinal data from 64 nations lends support to our propositions, thus helping unpack the puzzling relationship between entrepreneurship, innovation, and corruption.

Section snippets

Executive summary

What effect does corruption, typically defined as abuse of public power or authority for private benefit (Rodriguez et al., 2006), have on entrepreneurial and innovative activity across nations? Interestingly, and despite the fact that a growing stream of research documents a uniformly positive relationship between the control of corruption and improvement in a variety of important indicators of economic welfare including foreign direct investment (Lambsdorff, 2003, Mauro, 1995), productivity (

Literature and hypotheses

A growing stream of research documents a uniformly positive relationship between the control of corruption and a variety of indicators of economic welfare including per capita growth in GDP (Kaufmann and Kraay, 2003), the United Nations Human Welfare Index (Rose-Ackerman, 2004), bond spreads (Ciocchini et al., 2003), income inequality (Carmignani, 2005, Li et al., 2000), capital investment and foreign direct investment (Lambsdorff, 2003, Mauro, 1995), and total factor productivity (Lambsdorff,

Data

The dataset used in this study covers a seven-year period from 1996 to 2002 and contains information on 64 different countries. Data were collected from multiple independent sources. Information about domestic innovation, foreign direct investment, gross domestic product and population was obtained from the World Bank's World Development Indicators (WDI) data series (World Bank, 2003). Our estimates of entrepreneurial activity were obtained from the Global Entrepreneurship Monitor (GEM), which

Results

Descriptive statistics and correlations are presented in Table 1 and results are presented in Table 2. While the size of the correlations among Control of Corruption, Wealth, and Trade (which range from .70 to .73) initially raised concern about multicollinearity, tests indicate they did not pose a threat to statistical inference. (VIF values ranged from 1.18 to 5.80, and all condition indices were under 30). Kaufmann et al. (2007) found similar relationships between Control of Corruption and

Discussion

In this paper, we drew on the corruption, economic development, and entrepreneurship and innovation literatures to advance the hypothesis that better control of corruption will be associated with rising levels of innovation and entrepreneurship. In corrupt environments, we argue that agency and transactions costs, along with other non-productive consequences of corruption necessarily limit the scale and scope of economic activity (Wintrobe, 1995) and hence, reduce the magnitude of the incentive

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    We wish to thank the editors, reviewers and participants from the Journal of Business Venturing Conference on Ethics and Entrepreneurship for their comments and suggestions on earlier version of this manuscript.

    1

    Tel.: +1 801 983 7446.

    2

    Authors contributed equally and are listed in alphabetical order.

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