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Corruption and Firm Growth: Evidence from China

Yuanyuan Wang and Jing You ()

No 118, UCL SSEES Economics and Business working paper series from UCL School of Slavonic and East European Studies (SSEES)

Abstract: Corruption is one of the most pervasive obstacles to economic and social development. However, in the existing literature it appears that corruption seems to be less harmful in some countries than in others. The most striking examples are well known as the "East Asian paradox": countries displaying exceptional growth records despite having thriving corruption cultures. The aim of this paper is to explain the high corruption but fast economic growth puzzle in China by providing firm-level evidence of the relation between corruption and growth and investigating how financial development influences the former relationship. Our empirical results show that corruption is likely to contribute to firms' growth. We further highlight the substitution relationship between corruption and financial development on firm growth. This means that corruption appears not to be a vital constraint on firm growth if financial markets are underdeveloped. However, pervasive corruption deters firm growth where there are more developed financial markets. This implies that fast firm growth will not be observed until a later stage of China's development when financial markets are well-functioning and corruption is under control. Furthermore, the substitution relationship exists in the private and state-owned firms. Geographically, similar results can be seen in the Southeast and Central regions.

Keywords: Corruption; Firm growth; Chinese economy (search for similar items in EconPapers)
JEL-codes: D73 O16 O53 (search for similar items in EconPapers)
Date: 2012-03
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Published in China Economic Review (2012) vol. 23, iss. 2, 415--433.

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