Corruption as a structural determinant of growth for small and medium-sized enterprises. An empirical analysis on firm productivity, corruption and the missing middle.

The purpose of this study is to connect the research fields on corruption, firm productivity and the under-represented amount of medium-sized firms in developing countries characterizing the missing middle. This is done in an empirical study that exploits an extended firm-level data set in numerous economies with a focus on Sub-Saharan Africa, Latin America, the Caribbean and Asia. I use perceived corruption in a country to estimate the effect of corruption on firm productivity in a fixed effects estimation aiming attention at heterogeneity across firm sizes and regions. Results imply that reducing corruption has, in general, a positive effect on firm productivity measured in annual sales as well as in the number of employees, although this effect weakens with increasing firm size. The levels depend on the region that a firm is located in. I find that reducing corruption has the potential to induce growth for small firms in particular, with over-proportionate benefits in comparison to bigger firms. Therefore, fighting corruption can balance out the asymmetric firm size distribution. Furthermore, I explore mechanisms through which corruption impacts firm performance, discuss the results in a macroeconomic setting and identify the role of uncertainty for firms that arises due to changes in the level of corruption.