Corruption, growth, and governance: Private vs. state-owned firms in Vietnam

Journal of Banking & Finance:

Corruption, growth, and governance: Private vs. state-owned firms in Vietnam

Thuy Thu Nguyen, Business Administration Faculty, Foreign Trade University, 91 Chua Lang, Hanoi, Viet Nam
Mathijs A. van Dijk, Rotterdam School of Management, Erasmus University, Rotterdam, The Netherlands

A b s t r a c t

We provide a firm-level analysis of the relation between corruption and growth for private firms and state-owned enterprises (SOEs) in Vietnam. We obtain three different measures of the perceived corruption severity from a 2005 survey among 741 private firms and 133 SOEs. We find that corruption hampers the growth of Vietnam’s private sector, but is not detrimental for growth in the state sector. We document significant differences in the corruption severity across 24 provinces in Vietnam that can be explained by the quality of provincial public governance (such as the costs of new business entry, land access, and private sector development policies). Our results suggest that corruption may harm economic growth because it favors the state sector at the expense of the private sector and that improving the quality of local public governance can help to mitigate corruption and stimulate economic growth. 2012 Elsevier B.V. All rights reserved

1. Introduction
Fighting corruption is high on the policy agenda of many international organizations as well as governments in both developing and developed countries. According to the United Nations Secretary-General Ban Ki-moon’s message for International AntiCorruption Day (held every year on December 9th): ‘‘Corruption is a threat to development, democracy and stability. It distorts markets, curbs economic growth and discourages foreign investment’’ (United Nations, 2010). 
A large body of academic research studies the causes and economic consequences of corruption.
However, almost all empirical studies in the literature to date measure and analyze corruption at
the country-level. There are at least three arguments for why we need more firm-level analyses of the determinants and economic impact of corruption.
First, country-level research does not help us to understand the determinants of the level of corruption that individual firms face and why and how the level of corruption varies across firms within a country. Macro-economic factors such as inflation and economic development and country-level institutions, which have been examined in cross-country studies, cannot explain the substantial within-country variation in corruption we observe. Second, firm-level analyses are crucial to understand why and how the impact of corruption differs across firms. In particular, in many countries the effects of corruption on individual firms are likely to
differ due to the unequal treatment of public officials of firms in the private and state sectors of the economy. This issue is especially relevant in socialism-oriented and post-socialist countries, which
historically have strong policies that favor the state sector. Third, firm-level studies can have important policy implications and could, for example, provide countries with a high level of corruption with
recommendations on which local institutions matter for the prevalence of corruption.

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