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Open for innovation or bribery to secure bank finance in an emerging economy: A model and some evidence

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  • Tian, Xiaowen
  • Ruan, Wenjuan
  • Xiang, Erwei

Abstract

In an emerging economy like China characterized by scarce financial resources, excessive red tape, and rampant corruption, firms are advised to bribe bank officials to grease the wheels of bank lending in order to secure the fund they need for innovation, business venturing, and growth. Drawing on the literature on corruption and open innovation, we develop a model to illustrate that bribery fails to ease bank lending when red tape is endogenous whereas openness for innovation smooths bank lending no matter whether red tape is exogenous or endogenous. Openness for innovation is more effective than bribery in helping a firm reduce red tape to secure bank finance. Based on a dataset of Chinese firms provided by the World Bank, our findings strongly support the argument. We find that openness for innovation has a positive relationship with both the access to bank finance and the size of bank finance, whereas bribery is related to neither. Supplementary tests further suggest that the positive relationship is mainly driven by private firms and manufacturing firms. Our findings help firms make decisions to select an effective and yet socially responsible approach to securing bank finance.

Suggested Citation

  • Tian, Xiaowen & Ruan, Wenjuan & Xiang, Erwei, 2017. "Open for innovation or bribery to secure bank finance in an emerging economy: A model and some evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 142(C), pages 226-240.
    • Handle: RePEc:eee:jeborg:v:142:y:2017:i:c:p:226-240
    DOI: 10.1016/j.jebo.2017.08.002
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    Cited by:

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    2. Lee, Chien-Chiang & Wang, Chih-Wei & Ho, Shan-Ju, 2020. "Country governance, corruption, and the likelihood of firms’ innovation," Economic Modelling, Elsevier, vol. 92(C), pages 326-338.
    3. Nemlioglu, Ilayda & Mallick, Sushanta, 2021. "Effective innovation via better management of firms: The role of leverage in times of crisis," Research Policy, Elsevier, vol. 50(7).

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    More about this item

    Keywords

    Open for innovation; Bank lending decision; Red tape; Bribery; China;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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