Corruption, Innovation and Firm Growth: Firm-level Evidence from Egypt and Tunisia

Using recently collected firm-level data from Egypt and Tunisia, this paper explores the effect of institutional obstacles and corruption on the innovative behavior of firms and their effect on firms’ employment growth. We estimate the micro-level interactions between corruption and institutional obstacles and test the hypothesis that corruption ‘greases the wheels’ of firm performance when bureaucratic procedures are more severe and hampering innovation. Accounting for endogeneity and simultaneity, the paper uses a conditional recursive mixed-process model (CMP). The results show that corruption has a direct negative effect on the likelihood that a firm is an innovator, but a positive effect when interacted with institutional obstacles. This provides support for the hypothesis that corruption serves as a mechanism to bypass the bureaucratic obstacles related to obtaining the necessary business permits and licenses for product innovation. These effects also resonate into firm growth, through their effect on product innovation.