The World Bank's Asli Demirguc-Kunt, Meghana Ayyagari, and Vojislav Maksimovic, have just published research that examines how corruption - defined as both bribery of government officials and tax evasion - is correlated with the firm's innovation and financial development. Using firm-level data for over 25,000 firms in 57 countries, they find that the odds of having to pay bribes increase significantly for innovative firms compared to non-innovators, suggesting that corruption may act as a tax on innovation. The authors also find a significant correlation between bribes and tax evasion. Firms that pay bribes are more likely to underreport their revenue than firms that do not pay bribes. This is consistent with theories that government corruption breaks an implicit contract between citizens and the state, prompting firms to retaliate by evading taxes. The authors then examine the net burden of corruption on innovators and find that while some innovators do retaliate by evading taxes, overall innovators are more likely to be victims, who pay bribes but do not evade taxes, than perpetrators, who don’t pay bribes but do evade taxes. Finally, firms that rely on bank finance to pay for new investments and working capital are more likely to be victims (paying bribes but not evading taxes), whereas firms that use informal financing and financing from family and friends and other sources are more likely to be perpetrators (evading taxes despite not having to pay bribes). This last finding could indicate that formal financial intermediation and bank monitoring may play a critical role in helping curb tax evasion. The authors conclude that financial sector reform may help curb corruption, thereby also giving a boost to innovation.
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HERE.
