Grease or Sand in the Wheels of Commerce? Firm Level Evidence on Corruption and SMEs

Bribes can either put "grease" or "sand" in the wheels of commerce, affecting firm performance (at the micro-level) and, ultimately, economic growth (at the macro-level). These two opposing hypotheses on the role corruption plays in countries with weak institutions raise an important empirical question. This study examines this issue using a unique and exceptionally rich dataset on over 2000 micro, small and medium scale enterprises (SMEs) in over thirty cities in the Philippines. Using instruments such as industry-location averages of corruption to deal with endogeneity, and drawing on unique contextual information on public-private interactions on bribery, this study finds inconclusive evidence that bribery, on average, is detrimental to enterprise growth and performance. Yet bribery also occurs in different contexts, and a more nuanced empirical analysis reveals that bribery has a positive impact on the performance of some firms, notably those that are inordinately delayed by bureaucratic red tape and thus may have to proactively seek advantages to grease the process by bribing public officials. This study finds initial evidence that corruption greases the wheels of commerce for Philippine SMEs, particularly in cities with poor business environments