Determinants underlying incidence and amount of bribery an evidence from manufacturing firms in vietnam

UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS

VIETNAM - NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

DETERMINANTS UNDERLYING INCIDENCE
AND AMOUNT OF BRIBERY: AN EVIDENCE
FROM MANUFACTURING FIRMS
IN VIETNAM

BY

VU THI THUONG

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, November 2015


UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

INSTITUTE OF SOCIAL STUDIES
THE HAGUE

THE NETHERLANDS

VIETNAM - NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

DETERMINANTS UNDERLYING INCIDENCE
AND AMOUNT OF BRIBERY: AN EVIDENCE
FROM MANUFACTURING FIRMS
IN VIETNAM
A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

VU THI THUONG

Academic Supervisor:
DR. LE VAN CHON
HO CHI MINH CITY, November 2015


Declaration
“I declare that this thesis entitled “Factors influencing the propensity to bribe and size of
bribe payments: evidence from manufacturing firms in Vietnam”, which is submitted by
me in fulfillment of the requirements for the degree of Master of Arts in Development
Economics to the Vietnam – The Netherlands Programme (VNP).
The thesis was done only my original work and under the guidance of my supervision and
acknowledgement has been made in the text to all materials used.”
Vu Thi Thuong

Acknowledgments
This thesis could not have been completed without the support and encouragement that I
have received from many people.
First of all, I would like to express my deepest gratitude to my advisor, Dr. Le Van Chon
for his enthusiastic guidance and mentorship. He has oriented and supported me to break a
deadlock in times of finding new ideas for a new topic. He also always listens to my ideas
and discussions with me to figure out the way to solve problems. Moreover, he provided
me with essential skills for doing research, especially the skills of using econometric tools.
Besides, I truly appreciate the time he devotes to this thesis to carefully review my final
thesis draft and help me rearrange thesis structure reasonably as well as correct errors and
inappropriate words usages. It must take me a longer time to complete this project without
his invaluable sources of help.
From my sincere heart, I would like to thank all lecturers in VNP who equipped me with
useful knowledge to conduct this thesis as well as to serve my job in the future.
Especially, I would like to express my special thanks to Prof. Nguyen Trong Hoai, Dr.
Pham Khanh Nam and Dr. Truong Dang Thuy who always travel with me during the two
years of my Master program, share their practical profound insights and inspire the love of
scientific research.
Next, I would also like to thank all my friends here at VNP, especially Vu Thi Khanh, Le
Huu Nhat Quang for their enthusiasm of sharing data processing techniques with me; Bui
Minh Khoi, Nguyen Huong Nguyen for their spiritual encouragement during these
stressful and difficult moment. I also want to say thanks to VNP officers for their restless
assistance.
I would like to express my special thanks to Da Nang University Campus in Kon Tum who
has given me advantages to accomplish my Master program. I also want to thank my
colleague – Nguyen Thi Phuong Thao for her great support me during my writing of this
thesis.
I am deeply and forever indebted to my parents and my sister for their love, support and
encouragement throughout my entire life.

Abbreviations
CIEM

Central Institute for Economic Management

CPI

Corruption Perceptions Index

OLS

Ordinary Least Squares

PCI

Provincial Competitiveness Index

SMEs

Small and medium enterprises

TI

Transparency International

WB

The World Bank

UNDP

United Nations Development Programme


Abstract
Using a panel data set from the Small and Medium Enterprise (SME) Surveys from 2005 2013, this study investigates the factors which influence the incidence of bribery and the
size of bribe payment among formal and informal firms in Vietnam. Due to censored
nature of the data on bribes and sample selection bias, this paper applies Heckman two step procedure which was proposed by Heckman (1979) to correct these problems. This
study finds strong evidence that the propensity to bribe as well as the variation in the
amount of bribe is highly positively correlated with the interaction level with public
officials, the firm‟s ability to pay and the burden of regulation that firms face. In this paper,
the interaction with public officials is looked at different types of interaction. Besides, this
study also points out that company without official business registration licenses are more
likely to avoid paying the informal costs. These results are robust when the lagged values
of profit are used as instruments for profit.
Keywords: firms, bribery, Vietnam.


Table of contents
Chapter 1: Introduction .......................................................................................................... 1
1.1 Problem statement..................................................................................................................... 1
1.2 Research objectives .................................................................................................................. 3
1.3 Research questions.................................................................................................................... 3
1.4 The scope of the study .............................................................................................................. 3
1.5 The structure of the study ........................................................................................................ 4
Chapter 2: Literature review .................................................................................................. 5
2.1 Corruption .................................................................................................................................. 5
2.1.1 The definition of corruption ................................................................................................. 5

2.1.2 The Forms of Corruption ...................................................................................................... 6
2.1.3 Measuring corruption ............................................................................................................ 7
2.2 Empirical studies ..................................................................................................................... 11
2.2.1 Factors influencing the propensity to bribe ...................................................................... 11
2.2.2 How much must graft-paying firms pay? ......................................................................... 16
2.3 Basic framework to estimate the incidence and level of bribe ......................................... 16
2.4 Conceptual framework ........................................................................................................... 18
2.5 Chapter summary .................................................................................................................... 18
Chapter 3: Corruption in Vietnam ....................................................................................... 20
Chapter 4: Data and Econometric Model ............................................................................ 26
4.1 Data ........................................................................................................................................... 26
4.1.1 Data source ........................................................................................................................... 26
4.1.2 Data description ................................................................................................................... 27
4.2 Descriptive statistical analyses .............................................................................................. 28
4.3 Econometric model ................................................................................................................. 33
Chapter 5: Empirical results ................................................................................................ 37
5.1 Factors influencing the propensity to bribe ......................................................................... 39
5.2 Factors influencing the size of bribe payment .................................................................... 42
5.3 Robustness ............................................................................................................................... 43
Chapter 6: Conclusion ......................................................................................................... 47
6.1 Main findings .......................................................................................................................... 47


6.2 Policy implications ................................................................................................................. 47
6.3 Limitations and further research ........................................................................................... 48
6.3.1 Limitations ............................................................................................................................ 48
6.3.2 Directions for further studies ............................................................................................. 49
References ............................................................................................................................ 49
Appendices........................................................................................................................... 55

List of tables
Table 2. 1: Definitions of corrupt activities ........................................................................... 6
Table 2. 2: Summary of features of measures of corruption ................................................. 9
Table 3. 1: Vietnam‟s annual CPI result .............................................................................. 21
Table 3. 2: Average cost of bribes paid, by sector ............................................................... 23
Table 4. 1: Panel data structure ............................................................................................ 26
Table 4. 2: Data definition ................................................................................................... 27
Table 4. 3: The descriptive statistics of the size of bribe payment by location ................... 28
Table 4. 4: The descriptive statistics of the size of bribe payment by the legal ownership
form and sector .................................................................................................................... 29
Table 4. 5: The purpose of bribe payment ........................................................................... 30
Table 4. 6: The summary statistics of key variables ............................................................ 30
Table 4. 7: Pairwise Correlation. ......................................................................................... 32
Table 4. 8: The Expected Variables in Heckman two step .................................................. 36
Table 5. 1: Heckman two-step regression analyses the incidence of bribery and bribe
amount ................................................................................................................................. 38
Table 5. 2: Heckman two-step regression analyses the incidence of bribery and bribe
amount, using instrument variable ....................................................................................... 44

List of figures
Figure 3. 1 The most serious Economic & Social Issues for Vietnam ................................ 20
Figure 3. 2 Perceptions of the prevalence of corruption across sectors ............................... 21
Figure 3. 3 Key Indicators of Informal Charges (2006 to 2014) ......................................... 22
Figure 3. 4 The purpose of bribe payment ........................................................................... 23
Figure 3. 5 Awareness about the government's anti-corruption efforts ............................... 24
Figure 3. 6 Willingness to report an incident of corruption (Southeast Asia) .................... 25


List of appendix

Appendix 1: Heckman two-step regression on the incidence of bribery and the size of bribe
............................................................................................................................................. 55
Appendix 2: Heckman two-step regression on the incidence of bribery and the size of bribe
(corrects errors for heteroscedasticity) ................................................................................ 57
Appendix 3: Heckman two-step regression on the incidence of bribery and the size of bribe
(using instrument variable) .................................................................................................. 59
Appendix 4: Heckman two-step regression on the incidence of bribery and the size of bribe
(correct heteroscedasticity and using instrument variable).................................................. 61
Appendix 5: Heteroskedasticity test using Breusch-Pagan / Cook-Weisberg - the Heckman
two-stage model ................................................................................................................... 63
Appendix 6: Heteroskedasticity test using Breusch-Pagan / Cook-Weisberg - the Heckman
two-stage model when using instrument variable................................................................ 63


Chapter 1: Introduction
1.1 Problem statement
Corruption occurs in both developed and developing countries with various degrees
and has impacted on almost all parts of society (Lawal, 2007; Rohwer, 2009). Amundsen
(1999) described corruption as “a disease, a cancer that eats into the cultural, political and
economic fabric of society, and destroys the functioning of vital organs”. Besides, World
Bank (2009) identified corruption as “among the greatest obstacles to economic and social
development”.
In Vietnam, this problem is seriously alarmed for the government‟s failure to
reduce corruption over past years. In particular, the Corruption Perceptions Index (CPI)
2014, conducted by Transparency International ranked Vietnam at 119 out of 175 in
global and at 18 out of 28 in the Asia Pacific region. It is worthy to note that Vietnam‟s
CPI score is unchanged in three consecutive years from 2012 to 2014 whereas a positive
change was recorded in neighboring countries. Besides, according to a report of Provincial
Competitiveness Index (PCI) 2014, Vietnam witnessed a significant decline in controlling
informal cost that firms have to pay for running a business smoothly. More specially, the

proportion of companies paying bribe jumped from 41% in 2013 to 66% in 2014. 10% of
firms showed that more than 10% of their revenue spent on bribes. These pieces of
evidence reflect the seriousness of corruption in Vietnam despite the effort of reducing it
over the past years.
A massive body of academic research on corruption in the past decade divided into
two segments: the determinants of corruption and the effect of corruption on growth 1.
Regarding the determinants of corruption, some typical studies include Ades and Di Tella
(1997, 1999), Svensson (2000), Persson, Tabellini, and Trebbi (2003). Related to the effect
of corruption, a list of study can be seen Mauro (1995), Wei (1997) and Johnson et al.
(1997). Except for few studies, most of preceding studies share three common features.
First, these studies have primarily based on cross-country analyses. Second, they use
perceptive data rather than quantitative data due to the higher cost of collecting the later

1

For a review and summary, refer to Bardhan (1997), Jain (2001), Reinikka, Svensson (2002) and Aidt
(2003)

1


one. Third, the interpretation of corruption was based on a function of macro-factors such
as countries‟ policy or institutional environment.
This branch of the literature with above-mentioned characteristics such as
Kaufmann and Wei (1998) and Hellman et al. (2000). Kaufmann and Wei (1998)
examined the nexus between informal cost in the form of time spent by managers with
bureaucrats and cost of capital. To do this, they employed the firm-level data from three
different surveys covered around 48 - 73 countries. In this study, information about
corruption is based on perception indices constructed from questions related to country
characteristics. Also, Hellman et al. (2000) used a sample of 3300 firms in 20 countries

that were obtained jointly by the World Bank and the Office of the Chief Economist in
1999. They explained the validation of corruption based on the function of the politicalinstitutional environment, including protection of property rights and civil liberties.
These existing pieces of literature have provided important knowledge about the
aggregate determinants of corruption. However, the interpretation based on cross-country
analyzes as well as using perceptive data caused some drawbacks. Firstly, the exploiting
perception data on corruption can suffer from bias. In particular, certain studies suggest
that small firms are more likely to perceive their environment to be more corrupt than their
counterparts (Batra, Kaufmann, & Stone, 2003; Bennedsen et al., 2009). Similarly, more
productive companies tend to complain about their business environment more than less
productive companies do (Malomo, 2013). Secondly, macro- determinant of corruption
constrains the interpretation of variation in corruption within the country. In the other
word, country-level research cannot explain the variation of the level of corruption across
firms within a country (Svensson, 2002).
To avoid these problems, Svensson (2003) exploited the quantitative data on
corruption, derived from the Uganda enterprise survey in 1998 which was designed to
represent the population of private enterprises, operating in manufacturing and processing
sectors. However, there are two striking features in such data set. Firstly, not all firms in
the sample reported that they need to pay the informal cost. Secondly, there has a
significant variation in the size of bribe payment across firms under a similar policy. To
explain such variance, this paper developed a simple bargaining model, in which firms can

2


choose to either pay the bribe or exit the market when facing a request for a bribe of a
public official.
In similarity to Svensson (2003), this paper investigates the corruption in Vietnam
for the period from 2005 to 2013. Based on the quantitative information on corruption and
the detailed financial information from Small Medium Enterprise (SMEs) surveys in this
period, this study attempts to answer two questions: who must pay a bribe and how much

they pay. To answer these questions, this paper primarily uses control right hypothesis and
bargaining hypothesis. In which, control hypothesis suggests that the interaction level with
public official will determine whether or not a firm has to pay a bribe. The bargaining
hypothesis indicates that firm‟s bargaining power which measure by sunk cost component
and ability to pay will interpret how much a firm pays.
1.2 Research objectives
This study is to find out the factors that influence the incidence of bribery and the
size of bribe payment of firms in Vietnam. In other words, this study has two following
objectives:
(i) Specify the factors that affect the propensity to pay a bribe of formal and informal
firms in Vietnam.
(ii) Specify the factors that influence the variation in bribe amount across bribe-reporting
firms in Vietnam.
(iii) Give some policy implications in order to reduce corruption in Vietnam.
1.3 Research questions
This thesis aims to answer the following questions:
(i) Do the factors related to firm characteristics such as firm size, informal status, profit,
firm‟s choice of technology, etc. have influence the incidence of bribery?
(ii) Why do some firms have to pay more bribes than others?
(iii) What should be done to reduce corruption in Vietnam?
1.4 The scope of the study
The study uses the available data of SMEs surveys in Vietnam. These surveys were
conducted in the period of 2005 to 2013, covering around ten provinces and cities in
Vietnam. Except for foreign-owned enterprises, the surveyed samples include non-state

3


manufacturing enterprises with and without legal business registration licenses. The former
is called formal firms while the latter is named informal firms. Although the surveys cover

more than twenty manufacturing industries, this thesis will focus on 14 largest sectors in
terms of number of enterprises, including food products and beverages, fabricated metal
products, wood and wood products, furniture manufacturing, tanning and dressing leather
textiles, wearing apparel, paper and paper products, publishing - printing, chemical
products, rubber and plastic products, non-metallic mineral products, other machinery and
equipment, water treatment.
1.5 The structure of the study
This paper consists of six chapters. Following chapter 1 of introduction, chapter 2
describes a general picture about corruption, including definition, forms and the
measurement of corruption. This chapter also presents the empirical studies and theoretical
models that examine the incidence and level of bribe. Chapter 3 gives a brief overview of
corruption in Vietnam. Chapter 4 outlines the data and presents the descriptive statistical
analyses. In addition, the econometric models, as well as the variables, included in these
models also presented in this chapter. Then, the econometric results are discussed in
chapter 5. Finally, the main findings, limitations, policy implications and suggestions for
further researches are presented in chapter 6.

4


Chapter 2: Literature review
2.1 Corruption
2.1.1 The definition of corruption
The term of “corruption” originates from the Latin word “corruption”, meaning
“moral decay, wicked behavior, putridity or rottenness” (Milic, 2001). However, it is
difficult to give a globally accepted definition because corruption is a complex social,
legal, economic and political phenomenon. (Rohwer, 2009)
In reality, there are many different definitions of corruption. The most popular and
simplest definition is given by World Bank (1997), defining corruption as “the abuse of
public power for private benefit”. Corruption is also widely understood as „„the acts in

which the power of public office is used for personal gain in a manner that contravenes the
rules of the game‟‟ (Jain, 2001). Transparency International, 2009 defined that corruption
as „„misuse of entrusted power for private gain‟‟. This definition is similar with the World
Bank‟s definition; however it can cover the corruption activities in both public and private
sector. Besides, the Oxford Advanced Learner's Dictionary (2000, p. 281) suggested that
corruption is the association of two important elements: authority and morality. In
particular, corruption is described as “the dishonest or illegal behavior, especially of people
in authority” and “the act or effect of making somebody change from moral to immoral
standards of behavior”. The Vietnamese Law on anti-corruption, 2005 defined corruption
as “the acts committed by persons with positions and/or powers of abusing such positions
and/or powers for self-seeking interests”.
In the aspect of economics field, (Klitgaard, 1988) explained corruption through an
equation: Corruption = Monopoly Power + Discretion – Accountability. Besides, United
Nations Development Program (2004) uses another equation to define corruption, as
follows: corruption= (Monopoly Power + Discretion) – (Accountability + Integrity +
Transparency).
Awartani, H. (2009) suggests that corruption activities are conducted by two parties
consisting of demand-side supply-side. Demand-side corruption involves corrupt public
officials who asked individuals or companies to pay a bribe to receive public services or

5


implement regulations smoothly. Supply-side corruption is individuals or firms who
corrupt officials because of their benefit.
In general, corruption in the public sector is now widely accepted as “an illegal act
that involves the abuse of a public trust or office for some private benefit‟‟, or “the misuse
of public office for private gain.” (Fantaye, 2004).
2.1.2 The Forms of Corruption
As the broad definition suggests, corruption can occur in various forms. In

particular, Transparency International (TI, 2009) shows some popular forms of corruption
such as bribery, embezzlement, fraud, extortion, cronyism, nepotism, patronage and graft.
The definitions of these most common forms are given in table 1 as follows:
Table 2. 1: Definitions of corrupt activities
Category

Definition

Bribery

The payment (in money or kind) that is given or taken in a corrupt
relationship. Equivalent terms to bribery include, for example, kickbacks,
commercial arrangements or pay-offs. These are all notions of corruption
in terms of the money or favours paid to employees in private enterprises,
public officials and politicians.They are payments or returns needed or
demanded to make things pass more swiftly, smoothly or more
favourably through state or government bureaucracies.

Collusion

A secret agreement between parties, in the public and/or private sector, to
conspire to commit actions aimed to deceive or commit fraud with the
objective of illicit financial gain. The parties involved often are referred
to as “cartels”.

Conflict of
interest

A situation where an individual or the entity for which they work,
whether a government, business, media outlet or civil society

organisation, is confronted with choosing between the duties and
demands of their position and their own private interests.

Cronyism or
nepotism

A form of favouritism based on acquaintances and familiar relationships
whereby someone in an official position exploits his or her power and
authority to provide a job or favour to a family member or friend, even
though he or she may not be qualified or deserving. Nepotism may
stretch to include other common grounds such as race, religion, common
origin (e.g. from the same village or nationality).

6


Fraud

The act of intentionally deceiving someone in order to gain an unfair or
illegal advantage (financial, political or otherwise).

Gifts and
Hospitality

Gifts and hospitality (e.g. vacations, luxury dinner, etc.) that could affect
or be perceived to affect the outcome of business transactions and are not
reasonable and bona fide.

Lobbying

Any activity carried out to influence a government or institution„s
policies and decisions in favour of a specific cause or outcome. Even
when allowed by law, these acts can become distortive if
disproportionate levels of influence exist – by companies, interest groups,
associations, organisations and individuals.

Revolving
Door

An individual who moves back and forth between public office and
private companies, exploiting his/her period of government service for
the benefit of the companies they used to regulate.

Trading in
influence

The situation where a person is selling his/her influence over the decision
process involving a third party (person or institution).

Patronage

Patronage refers to favouring political supporters, for example with
government employment.

Source: Transparency International (2009)
Besides, according to Rohwer (2009) and TI (2015) another popular criterion to
classify corruption is based on scales of corruption. In this way, corruption is classified as
petty and grand corruption. TI (2009) defined petty corruption as “everyday abuse of
entrusted power by low- and mid-level public officials” when they interact with ordinary
citizens who are trying to connect to public services such as hospitals, schools, police

departments and other agencies with the small scale of monetary transaction. On the other
hand, “grand corruption consists of acts committed at a high level of government that
distort policies or the central functioning of the state, enabling leaders to benefit at the
expense of the public good” (TI, 2015).
2.1.3 Measuring corruption
Corruption is a complicated social, political and economic phenomenon that cannot
be measured directly. However, the past decade witnessed a rise in public awareness of this
problem along with an extension of corruption measurement (Rohwer, 2009). The key
mode of measurement since the mid-1990s is perceptions - based. Some indices at the
aggregate level in this period can be listed such as the Corruption Perception Index (CPI),

7


the Bribe Payers Index (BPI), the Global Corruption Barometer (all produced by
Transparency International), the Business Environment and Enterprise Performance
Surveys (BEEPS). Another aggregate indicator may be mentioned is the Control of
Corruption element in the World Bank Group‟s Worldwide Governance Indicators (WGI)
(Heywood, 2014). Table 1 will summary some features of these measures.
It is noted that due to the lack of global consensus on the definition of corruption,
the multi-face of this issue and its nature, it is almost impossible to give an accurate and
objective measure for corruption (Rohwer, 2009). However, it is necessary to distinguish
three types of corruption indicators: perception – based indicators, experience-based
indicators, and proxy indicators. The perception-based indicators base on the opinions and
perceptions of corruption of citizens and experts. The experience-based indicators base on
the actual experience of citizens or firms. The proxy indicators measure corruption
indirectly by trying to aggregate many opinions and signals of corruption or estimate
though opposite aspects such as anti-corruption, good government, etc. (UNDP 2008, 8
ff.).

8


Table 2. 2: Summary of features of measures of corruption
Index/Survey

Definition of corruption

Information

Source

Measured

sources
Statistical

summary

Coverage
of

Interpretation

expert

Corruption

Perceived

corruption assessments (e.g. expatriate business Almost global depending on having

Perceptions

(composite) and some measures executives, senior business leaders, sufficient sources. Annual (though

Index (CPI)

of corruption control

assessment by the US, regional, and not all data sources annual)

Cross-sectional ranking of
perception of corruption focusing on
business environment

in-country experts )
Perceived corruption
Control of

(composite) and some business

Corruption

and

Index (CCI)

evidence and corruption control

public

opinion

survey

Almost global depending on having
Similar sources to CPI but with some sufficient sources.
survey evidence

Biannual (though not all data
sources annual or biannual)

assessment
Public

Integrity

Index (PII)

Index (BPI)

Overall institutional

Sources may be somewhat wider
than business environment focus of

Absolute ranking (in principle

the environment for controlling

Expert assessment

25 countries

allows assessment of change over

corruption

time)

companies from different

21 countries based on evidence

countries to pay bribes, and

Business experts

from

sectors in which bribery most

main

emerging

Global

Bribe payments by households

Corruption

and

Barometer

corruption prevalence

perceptions

market

economies. Last carried out 2002

prevalent

public

perception of corruption.

CPI

Perceived willingness of
Bribe Payers

Cross-sectional ranking of

of

Public opinion surveys and partial
household surveys

pay bribes in different countries. The
validity of perceptions and weighting
uncertain.

69 countries in 2005,

Comparative prevalence and

though not nationally

amounts of bribe payments

representative in

9

Ranking of perceived willingness to

though the quality of survey data


many cases

(GCB) and
Related

needs validation

surveys

by
Transparency
International
World Bank
Enterprise
Survey

Bribe payments by firms

Surveys of businesses

Bribe payments by households

Household surveys

62 countries, various
years

Quantitative comparisons of
bribe prevalence and cost

(WBES)
Governance and
Corruption
Diagnostic

16 countries

Surveys
(GCDS)

Source: Oxford Policy Management (OPM), 2007

10

Quantitative comparisons of
bribe prevalence and cost


2.2 Empirical studies
2.2.1 Factors influencing the propensity to bribe
Previous firm-level studies have examined the drivers of bribery and the size of a
bribe, indicating that these two things are affected by the interaction level with public
officials and several firm characteristics2. Besides, Rand and Tarp (2012) also suggests that
the informality status of firms is a good indicator to interpret the incidence of bribery.
These studies examine the incidence of corruption in a situation where the firm with
some probability faces a request for a bribe from the officials for running a business
smoothly. The corrupt officials who have discretionary power may take actions aim to either
benefit or hurt the firm. This section reviews the previous empirical studies investigating the
factors influence the propensity to pay a bribe. These factors are divided into three groups,
including (i) control right of public officials over firms, (ii) bargaining power and (iii)
visibility.
(i) Control right: includes several indicator variable capturing the degree of interaction level
with public officials and the regulatory burden that the firm faces.
Regulations
Tanzi (1998) suggested that the bribery may derive from the burden of regulations.
There is no denying that the regulations such as licenses, permits, etc. are of importance for

governments to manage society and economy. However, the existence of these regulations
along with the monopoly power of the government officials in controlling these activities
gives officials a good opportunity to extract a bribe from those who need the authorizations
or permits. The author also showed that the emergence of these regulations requires a
frequent and direct contact between government officials and citizens. Citizens have to spend
a large amount of time to deal with these regulations. This time amount can be reduced
considerably through the payment informal cost.
In line with Tanzi (1998), Svensson (2003) also demonstrates the influence of control
right on the incidence of corruption, in which control right refers the interaction between
firms and government. In this study, the extensive interaction with public officials is
measured by two variables, including regulations which reflect the percentage of
2

See, Svensson (2002), Lee, S. H., Oh, K. K., & Eden, L. A., (2010); Rand, J., & Tarp, F. (2012) and Malomo,
F. (2013)

11


administrator‟s time spent dealing with a government regulations each month and the
monthly cost for accountants, lawyers who deal with regulation and taxes. Meanwhile, Rand
and Tarp (2012) use the number of government inspectors which strongly correlate with the
time use of management to deal with the government to measure the degree of interaction
with public officials.
Svensson (2003) finds that the probability of paying bribe positively related to the
degree of interaction with public officials. More specially, enterprises usually have to pay the
informal cost when they deal with public officials who have the power to affect their
business. They are more likely to spend more time dealing with public regulation. Besides,
they also face an increase in payment for accountants and specialized service providers to
deal with regulations and taxes.

The burden of regulation that firm faces (Tax)
Svensson (2003) and Malomo (2013) suggested that the burden of regulation caused
the firm to facing a higher risk to pay a bribe. To measure the burden of regulation, Svensson
(2003) use the type of taxes the firms have to pay while Malomo (2013) use the percentage of
sales declared for tax purposes. Svensson (2003) fail to demonstrate the effect of the type of
taxes on the incidence of corruption due to the multicollinearity problem. However, when
overcoming this issue by using principal components analysis, the author points out the
significant and positive relationship between two variables. Similarly, Malomo (2013) also
find evidence that companies that spent increasing percentages of sales for tax purpose are
more likely to pay a bribe.
Export dependence
Lecraw (1984) and Luo (2007) suggest that certain firms mainly sell their product to
domestic customers while other firms primarily generate their income by exporting their
output to global market. The former are more likely to be required to interact more intensely
with local supplier, customers, labor force and public official when they operate their
business which caused their exposure to corrupt practices. This can be explained by the fact
that the intensification of exposing to the internal environment will make firms contact with
to a wider range of potential legal vulnerabilities related business' regulatory requirements.
On the other hand, Kobrin (1987), suggest that exporting firms characterized by higher
technical and managerial capabilities which are strengthened over time through the learning
and innovation when they business in the global market. Their profitability is less likely to

12


suffer from the vulnerability to government corruption than their counterparts. This enables
them to raise the firm‟s bargaining power vis-à-vis government.
Another argument for the negative relationship between export and the drivers of
corruption as follows. In developing countries and especially in countries with balance of
payments problem, export activities are highly appreciated because of their contributions to

foreign exchange and employment (Grosse, 1996; Vernon, 1971; UNCTAD, 2006). This
points out that export-oriented firms have high national salience and public officials are more
likely to dampen their bribe demands in order to avoid punishment (Lee, Oh & Eden, 2010).
In addition, Lee, Oh, and Eden (2010) also suggest that the competition among national
governments in attracting and supporting export-oriented firms will strengthen the firm‟s
bargaining position. With above arguments, Lee, Oh, and Eden (2010) give the hypothesis
that the export-oriented firms are less likely to face a risk of to pay the informal cost as well
as the smaller the bribes have to pay to government officials.
The dependence of firm’s profitability on government
Pfeffer and Salancik (1978) showed that there is the difference in firm-level
profitability dependence on the government among firms. The companies obtaining a large
share of their revenue from government tend to more beholden to the whims of the public
official. Such dependence comes to be problematic when the corruption dominates the award
of state contracts (Dela Rama, 2012). Because the sales from such contracts might be
important for companies‟ survival, the firms‟ strategies might aim to induce political
decisions in favor of them. This subsequently requests firms to develop more internal
resources to quickly obtain information on their government characteristics (Hillman & Hitt,
1999; Hillman, 2005).
Hansen et al. (2009) indicated that when state-owned enterprises have become firm‟s
key client will have a positive and significant impact on firm performance. It may be argued
that there is an informal split benefit between the firm and the government official. Rand and
Tarp (2012) and Malomo (2013) also use a dummy variable that indicates whether the
government is a firm‟s customer, to examine the bribe incidence. They give hypothesis that
when firm‟s business depends on government contracts or government is a firm‟s customer,
the firm is more likely to corrupt public official.
The dependence of firm’s input on government
According to Tanzi (1998), in most countries, sate sector engages in providing of
goods, services, and resources at a lower price than market prices. The list of these public
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goods and services can be listed as foreign exchange, credit, public housing, public land,
electricity, water or some public services such as such as health care, education, and so on.
With access to a large amount of these public goods at a below-market price, some groups of
people can considerably benefit from trading these goods. Sometimes, the limited supply
causes the shortages of these products; therefore, a solution like ration coupon becomes
unavoidable. Because the responsibility of allocating the limited supply is often of public
employees, people who would like take advantages of access would be willing to pay the
informal cost to the public official.
Svensson (2003) and Malomo (2013) also examine the relationship between the
degree of using public services such as electricity, water, telephones and waste disposal and
the propensity to pay a bribe. They point out that the companies receiving public services t
have a higher risk of paying a bribe.
In line with Svensson (2003) and Malomo (2013), Rand and Tarp (2012) prove that
when the government as firms‟ main supplier, they face a higher probability of paying a
bribe.
Government assistance
According to Rand and Tarp (2012), over the past years, to promote the development
of SMEs, Vietnamese Government has implemented many supporting policies, divided into
two groups: financial and technical assistance. However, there has been a significant decline
in the proportion of firms receiving assistance from government authorities since the 1990s.
This trend is in line with the Vietnamese government‟s strategy of promoting private sector
development. However, this also caused of an increase in exposing to potentially corrupt
activities. This hypothesis was proved when these authors find that the firms receiving
government assistance face a higher probability of paying the informal cost.
In line with Rand and Tarp (2012), Stensson (2002) also suggests that tax exemption
is one of the firms‟ incentives to pay a bribe. However, this study fails to prove this
relationship.
(ii) Bargaining hypothesis
Svensson (2003) constructs a bargaining hypothesis suggesting that firms‟ ability to

pay and firms‟ refusal power influence the probability of having to pay a bribe. In which
firms‟ ability to pay is measured by firm‟s profitability and firms‟ refusal power is measured
by firm‟s choice of technology. The author expects that companies with high profit are more
likely to force to pay a bribe. Besides, he suggests that firms with low sunk cost implying low
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cost existing current industry will strengthen firms‟ refusal power. However, the result of this
study shows that there is no link between firms‟ ability to pay and firms‟ refusal power and
the incidence of corruption.
In line with Svensson (2002), Rand and Tarp (2012) and Malomo (2013) also test the
relationship between these variables. Malomo (2013) points that profit and sunk cost don‟t
influence on whether or not companies have to pay informal cost whereas Rand and Tarp
(2012) find a significant and positive relationship among them. These results prove that the
test of bargaining hypothesis is still ambiguous.
(iii) Visibility
Stensson (2002) hypothesizes that firm visibility will affect the propensity to pay a
bribe. Rand and Tarp (2012) give two visibility proxies: firm size and the informal status of
firms.
With regard to firm size which is usually measured by the total number of firm‟s
employees or the logarithm of the total number of firm‟s employees at the end of the most
recent fiscal year3. There is not consensus about the effect of firm size on the propensity to
bribe. More specially, Beck et al. (2005) point that smaller firms are less likely affected by
rent-seeking bureaucrats and other institutional problems compared to their larger
counterparts. However, Hellman and Schankerman (2003) show that relative to their larger
peers, smaller firms pay a higher proportion of their income as bribes and the frequency is
asked to pay informal cost also more permanent. In addition, weak political resources of
smaller firms make them be not able to shape regulation in their favor. This caused them
become more vulnerable to government predation (Bennedsen et al., 2009; Harstad &
Svensson, 2011). Besides, Rand and Tarp (2012) find a positive and statically significant

relationship between firm sign and the incidence of bribe whereas Svensson (2003) failure to
prove this relationship.
Related to firm‟s informal status, Rand and Tarp (2012) suggests that smaller and
informal firms seem to hide more easily from government regulation and easily avoid bribe.
Sharing the similar view with these authors, Dabla-Norris and Koeda (2008) argued that thethe main drivers of the increase in the number of such firms are to reduce or eliminate tax
burden as well as avoid complex administrative procedures and bribe incidence.
However, Rand and Tarp (2012) also points out an opposite effect of informality on
bribe incidence. In particular, if the firms may seek the benefits of informality, they are
3

Svensson, 2002; Rand, J., & Tarp, F., 2012, Galang, R. M. N., 2013.

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