Corruption, R&D and performance: firm-level evidence from Latin America

Purpose This study aims to investigate how firms' perceived level of corruption moderates the relationship between Research and Development (R&D) investments and firms' financial performance. Design/methodology/approach The study has used dynamic panel data for local private and public firms from Latin American countries (Brazil, Chile, Mexico and Peru) during 2012-2019. The unbalanced panel was estimated using generalized method of moments (GMM) and instrumental variables (IVs) to account for endogeneity issues. Findings The results showed that corruption has a direct and positive effect on firms' financial performance. Moreover, while firms' financial performance increases in the presence of corruption, the authors' findings suggest that corruption negatively moderates the relationship between R&D investments and firms' financial performance. This finding exposes the debate "grease the wheels" once corruption appears to work much more like sand than grease on more innovative firms. Finally, the authors observed a negative effect of long-term R&D investments on firms' performance, indicating that high levels of corruption harm even more long-term innovative activities. Research limitations/implications The authors have delimited the scope to firms from four Latin American countries, and thus, the generalization to other countries, from Latin America or other emerging countries, needs to be made with caution. Furthermore, the authors used the corruption perception index (CPI) to assess the extent of corruption and, apparently, using a single measure may limit the understanding. Future research may deepen the authors' comprehension by exploring the effects of the different practices or types of corruption. Practical implications The authors' findings have challenging policy implications denoting policymakers need to prioritize the institutional quality to reduce corruption and foster firms' R&D investments. Originality/value The paper has adopted a unique firm-level dataset from an underresearched region. This enriches a long-standing debate by providing new insights of corruption effects in Latin America. Therefore, the authors provided new evidence of the moderating relationship between corruption and R&D investments on more innovative firms' performance.