Exports, corruption and innovation

Abstract

Do export demand shocks affect firms’ investments in R&D? In this paper, I argue that corruption levels in firms’ countries of origin matter for answering that question. I develop a theoretical model, which predicts that if the overall impact of an export demand shock is positive, innovations of firms from non-corrupt states will increase more than those of firms from corrupt states. If the overall impact is negative, R&D investments of firms from non-corrupt states will decline less than the investments of firms from corrupt countries. The model predicts that it can also be possible for R&D investments of firms from corrupt countries to decline/stay the same, but the investments of the ones from non-corrupt states to go up, but not vice versa. To test these predictions empirically, I construct a measure of corruption using data from three non-governmental organizations and employ firm-level data covering firms from different countries. The empirical results suggest that, on average, manufacturing firms from non-corrupt countries invest around 7.8 times more into R&D than the ones from corrupt states. Moreover, an increase in the export market size is found to be positively associated with R&D investments of manufacturing firms originating from non-corrupt states. In most empirical specifications, I find a negative statistical association between the R&D investments of manufacturing firms from corrupt countries and the increase in the export market size.