Bribery and Investment : Firm-Level Evidence from Africa and Latin America

Research summary: Using a unique database that measures firm-level bribery in Africa and Latin America, we corroborate extant results in the literature that paying bribes deters firm investments in fixed assets. Our contribution is to explore four mechanisms. By adopting a reverse causality approach (Gelman and Imbens, 2013), we find evidence consistent with one of them: short-term oriented firms prefer to bribe rather than invest in fixed assets, while the opposite is true for firms with a long-term orientation. We rule out that bribe payments drain financial resources for investment, that firms that invest do not bribe because fixed assets make them less flexible and more vulnerable to future bribes, and that less efficient firms bribe rather than invest. Managerial summary: We ask whether, along with ethical issues, bribing affects the behavior and performance of firms in Africa and Latin America. Our statistical analysis shows that bribe payments do not reduce the short-term performance of firms, but frustrate investments in fixed assets, which is the foundation of firms' long-term growth. 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. We rule out some common explanations for the trade-off between bribing and investment (e.g., bribes drain resources to invest or that less efficient firms bribe and do not invest). Our analysis suggests that firms with short-term orientations are more likely to bribe and firms with long-term orientation are more likely to invest.