Corruption is Particularly Harmful to Small Firm Innovation

Firms invest in innovation if they expect future market benefits from those investments. Patents and quality certifications are common means for firms to claim such gains. However, in order to obtain quality certifications and patents, firms have to apply to accredited national institutions. If national officials ask for bribes in exchange for dealing favorably with these applications, then bribes raise the costs of engaging in innovation and possibly discouraging firms from investing in R&D.

New academic research presented at the European Policy for Intellectual Property (EPIP 2015) conference in Glasgow, organized by CREATe (Research Councils UK Copyright Centre), reveals how corruption impacts the behavior of different firms seeking quality certifications and patents.

Corruption reduces opportunities for smaller firms to engage in innovation

Using firm data for 48 developing and emerging countries, the study find that corruption has negative impacts on firms’ ownership of quality certifications. These impacts are much stronger for smaller firms than they are for larger firms. Exporters and firms with foreign or public ownership status are not affected by corruption. The research evidence also shows corruption also has negative significant effects on firms’ investments in machinery, which are needed to introduce innovations.

The fact that corruption is a barrier to firms’ innovation performance is a strong motivation for policy to fight corruption. The stronger impacts of corruption on smaller firms provide additional reason for policy action: Corruption contributes to excluding smaller firms, with greater agility to introduce novel ideas, from innovation. If policies help improve framework conditions for these smaller firms, then their participation in innovation activities is strengthened. Offering corresponding opportunities in emerging and developing countries also matters to improve welfare and aggregate economic performance as these economies are characterized by “islands of excellence” of highly innovative firms in a sea of firms of weak innovation capacities.

Creating objective criteria to award public services avoids negative impacts from corruption

Conversely, the study, which will be published in the Journal of Development Economics, finds corruption does not affect firms’ ownership of patents. This suggests that differences in the characteristics of patents and quality certificates matter. The criteria to award patents are often more objective compared to those for the quality certificates that assess non-technological and management innovations. Leading firms with high-quality inventions also have the option to file patent applications directly abroad. In consequence, it is more difficult for corruption-prone officials to obtain bribes for patents.

These findings suggest it is important to create, where possible, objective criteria based on which firms receive innovation-related government services, including permits, subsidies and grants. Such criteria restrain corruption-prone officials’ opportunities to ask for bribes as firms that refuse to pay bribes can demonstrate easily that they are entitled to receive government services. Providing options of places where firms can receive services – as is the case for international patents – is another possibility. Such options reduce monopolies in the delivery of public services and consequently opportunities for corrupt officials to seek bribes.

Public institutions that support more reliable business environments foster innovation

The study also finds public institutions, which include the legal system, competition agencies and other regulatory bodies, can improve conditions for innovation if they create more reliable business environments. Success in creating trust in business levels expands the likelihood of firm quality certificate ownership on top of the gains from reducing corruption because in these environments firms collaborate more and exchange more knowledge. They also set up more efficient decentralized management arrangement. All of these factors enhance innovation.


Notes for editors: ‘Corruption’s Asymmetric Impacts on Firm Innovation’ by Caroline Paunov is a paper presented at the European Policy for Intellectual Property (EPIP) Conference, University of Glasgow, 2-3 September 2015. The research is also forthcoming in the Journal of Development Economics. For more information visit:

Disclaimer: The findings expressed in this note and in the research paper are those of the author and do not necessarily represent the views of the OECD or its member countries.

Caroline Paunov is Senior Economist at the Directorate for Science, Technology and Innovation at the OECD.

For further information please contact the study’s author Caroline Paunov (email:

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