The impact of corruption and ownership on the performance of firms in Central and Eastern Europe

Abstract

This article investigates how the efficiency of the business environment and corruption (informal payments and state capture) affect the microeconomic performance of firms. The novelty of the study is to look at the interaction of these effects with firm ownership. We use firm-level micro data collected by the Business Environment and Enterprise Performance Survey (BEEPS) for 27 transition countries for 2002–09. Among other data, BEEPS collects information on different forms of corruption at the firm level and firm ownership. We find the somewhat surprising result that private firms (domestic and foreign-owned) are more involved in both informal payments and state capture. Our results also reveal that foreign-owned firms that are involved in informal payments are likely to benefit from these corrupt practices. On the other hand, state-owned firms are more likely to experience negative effects of involvement in corruption on productivity growth. After 2004 involvement of firms in corrupt practices diminished and their negative impact on firm performance declined, indicating an improvement in the stability of the business environment and law enforcement.

Acknowledgements

This article has benefited from the financial support of the European Investment Bank (EIB), funded under the STAREBEI programme for financing of university research. The views expressed herein are those of the authors and do not necessarily reflect those of the European Investment Bank. We also thank EIB Economic and Research departments, participants at the EIB Third Annual Meeting, and especially EIB Co-tutor Simona Bovha Padilla and EIB Economic Adviser Maria Luisa Ferreira for offering very constructive and helpful suggestions. The article has also benefitted from discussion with participants at the ICABEC conference (Kuala Terrengganu) and EBR Conference (University of Ljubljana).