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The Impact of Corruption on SMEs’ Access to Finance : Evidence Using Firm-Level Survey Data from Developing Countries (English)

The present paper estimates the impact of bureaucratic corruption on access to finance of small and medium-size enterprises in 114 developing countries. Corruption can hurt small and medium-size enterprises’ access to finance by lowering profits, increasing credit demand, increasing bankruptcy chances, creating uncertainty about the firm’s future profit, and exacerbating the asymmetric information problem between borrowers and lenders. Consistent with this view, the findings show a large adverse effect of higher corruption on small and medium-size enterprises’ access to finance. An increase in corruption from its smallest to highest value increases the likelihood of small and medium-size enterprises being financially constrained from 6.9 to 10.9 percentage points. The analysis uncovers several heterogeneities in the corruption-finance relationship. For instance, the adverse effect of corruption on access to finance is much less in countries where financial institutions protect the rights of borrowers and lenders are stronger, laws provide for better credit information, and credit bureaus exist. The paper argues that these heterogeneities derive from the specific ways in which corruption impacts access to finance. Thus, they help to raise confidence against endogeneity concerns about the main results. Other heterogeneities uncovered suggest that corruption is more harmful to firms more that, absent corruption, are known to enjoy better access to finance, such as male versus female owned firms, relatively large firms, and better performing firms. The results have important policy implications for the growth of small and medium-size enterprises in the developing world.

Details

  • Author

    Amin,Mohammad, Motta,Vctor

  • Document Date

    2021/10/19

  • Document Type

    Policy Research Working Paper

  • Report Number

    WPS9812

  • Volume No

    1

  • Total Volume(s)

    1

  • Country

    World,

  • Region

    The World Region,

  • Disclosure Date

    2021/10/19

  • Disclosure Status

    Disclosed

  • Doc Name

    The Impact of Corruption on SMEs’ Access to Finance : Evidence Using Firm-Level Survey Data from Developing Countries

  • Keywords

    corruption; economic freedom; access to finance; firm-level survey; access to financial service; enforcement of creditor right; policy point of view; access to external finance; petty corruption; chance of bankruptcy; credit market imperfection; journal of finance; form of corruption; indicator of corruption; country fixed effect; Rule of Law; capital market imperfection; credit information index; nationally representative survey; effects of corruption; number of workers; measure of corruption; Global Indicator; emerging market finance; list of countries; credit reporting system; foreign-owned company; improvements in access; international capital market; investor protection law; effect of regulation; returns to capital; incidence of corruption; perception of corruption; growth and development; impact of regulation; limited liability company; primary education enrollment; secondary education enrollment; lack of collateral; access to capital; public policy objective; availability of credit; rent-seeking activity; Land Ownership; corruption and growth; financial sector performance; less developed country; small business economics; regulation of entry; supply of finance; asymmetric information problem; financial constraint; business environment; regression results; red tape; high corruption; power outage; proxy measure; annual sale; bribe payment; credit bureaus; judicial corruption; medium-size enterprise; firm performance; public official; labor productivity; marginal effect; bureaucratic corruption; physical infrastructure; firm size; regulatory burden; internal fund; mean value; explanatory variable; corruption variable; high probability; informal sector; informational asymmetry; standard deviation; empirical analysis; financial market; human capital; financial intermediaries; informal firms; tax official; estimation methodology; loan application; robustness check; fixed asset; gender composition; Fixed Assets; capital use; greater access; Business Regulation; permanent worker; Gender Gap; foreign ownership; conducting business; electricity connection; legal right; government service; manufacturing sector; positive relationship; emerging country; lending process; odds ratio; banking industry; credit constraint; Macroeconomic Stability; Banking Regulation; Economic Studies; cultural change; gestation period; financing pattern; productivity level; employment growth; Political Economy; modern technology; quality certification; export activity; financial problem; harmful effect; small bank; large bank; financial instrument; research observer; firm entry; industry group; banking structure; SME financing; measurement error; Public Services; firm growth; baseline model; macro level; several factors; economic study; financial environment; legal structure; monetary economics; business cycle; financial structure; legal constraint; financial economics; financial outreach; lending practice; female entrepreneur; finance relationship; labor regulation; sole proprietorship; Bankruptcy Law; credit registry; limited partnership; foreign company; composite index; collateral agreement; previous paragraph; financial resource; public choice; moral hazard; adverse selection; high bribe; financing need; ceteris paribus; theoretical model; high power; financial account; independent audit; capital stock; data limitation; productive capacity; tax rate; richer countries; woman owner; export status; government regulation; legal system; freedom from; legal protection; account audit; informal competition; organizational structure; baseline regression; corruption indicator; average values; high tax; supply side; several reasons; credit demand; higher uncertainty; several elements; random sampling; standard error; transition countries; transition country; business administration; power supply; differential impact; summary statistic; Research Support; important policy; baseline estimates; adversely impact; term finance; manufacturing industry; open access

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Citation

Amin,Mohammad Motta,Vctor

The Impact of Corruption on SMEs’ Access to Finance : Evidence Using Firm-Level Survey Data from Developing Countries (English). Policy Research working paper,no. WPS 9812 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/935941634651569360/The-Impact-of-Corruption-on-SMEs-Access-to-Finance-Evidence-Using-Firm-Level-Survey-Data-from-Developing-Countries