Corruption, transaction costs, and innovation in Africa

Abstract

This paper examines the relationship between corruption, transaction costs as measured by asset specificity, and innovation in Africa. We hypothesize that in the context of developing countries in Africa, corruption is positively associated with innovation. In addition, we hypothesize that this relationship is mediated by physical asset specificity and human asset specificity. These hypotheses are tested by means of a multiple mediation model. The product of coefficients approach and bootstrapping techniques are used to estimate firm-level data from the 2013 World Bank Enterprise Survey and 2013 Innovation Follow-up Survey. The results from the estimations reveal that corruption is positively associated with innovation, and that physical asset specificity mediates this relationship. There is no evidence suggesting that human asset specificity mediates the relationship between corruption and innovation. We conclude that the positive relationship between corruption and innovation offers support to the hypothesis that corruption ‘greases-the-wheels’ of innovation in Africa. Furthermore, physical asset specificity increases the likelihood of innovation in a business environment characterized by a high degree of corruption.