In economies where government officials can be bribed, or other acts of corruption undertaken to start a business or innovate, entrepreneurship is less likely to thrive.
Entrepreneurship is vital for the development of a vibrant private sector which, in turn, contributes to economic growth. In contrast, corruption is widely viewed as a big barrier to economic growth, especially in developing economies.
However, it is not clear whether corruption harms or benefits entrepreneurship because there are plausible grounds for both a positive and negative relationship. In highly regulated economies, corruption can boost entrepreneurship by mitigating the detrimental effects of excessive regulation—that is, by greasing the wheels of entrepreneurship.
On the other hand, corruption can toss sand in the gears of entrepreneurship when the fruits of entrepreneurial activity are arbitrarily confiscated by authorities in the absence of bribes, especially in institutionally weak developing economies.
The prevalence of corruption may thus reduce the reward from taking risks, which is a defining feature of entrepreneurship, and thus deter entrepreneurship. Whether corruption benefits or harms entrepreneurship is thus an empirical issue. However, existing empirical evidence is mixed and inconclusive.
As part of our research for the Asian Development Outlook 2020 Update theme chapter Entrepreneurship in the Digital Age, we examined the relationship between corruption and entrepreneurship by examining 61 economies between 2007 to 2017. Our study looked at new firms and the people who started them.
We found that better control of corruption is positively associated with entrepreneurship. This is particularly true for the ability to start a new business, which is key to entrepreneurship. We also found that market size encourages entrepreneurship while corporate income taxes do not.
Less corrupt economies enjoy more vibrant entrepreneurship and more corrupt ones suffer from weaker entrepreneurship.
An important caveat in interpreting this evidence is that corruption and entrepreneurship influence each other, making it difficult to establish causality. In economies where entrepreneurship is weak, for instance, entrepreneurs tend to depend on political connections to make a profit rather than on their own efforts, thereby fostering corruption.
Lack of entrepreneurship can foster corruption because individuals with limited entrepreneurial skills gain business by cultivating politicians and bureaucrats. Conversely, vibrant entrepreneurship weakens corruption because entrepreneurs compete by innovating and improving product quality instead of fostering political connections.
We also found that the impact of corruption on entrepreneurship is not only statistically significant but also economically significant. For instance, the empirical results indicate that a decrease in corruption increases the entry rate of new firms.
Overall, our analysis found robust empirical cross-economy evidence of a negative relationship between corruption and entrepreneurship. That is, less corrupt economies enjoy more vibrant entrepreneurship and more corrupt ones suffer from weaker entrepreneurship.
The bottom line is that corruption, which is a bad thing in and of itself, entails the significant cost of discouraging entrepreneurship, a key driver of economic growth and development.
This blog post was based on research contained in the Asian Development Outlook 2022 Update: Entrepreneurship in the Digital Age.