How do foreign firms' corruption practices affect innovation performance in host countries? Industry-level evidence from transition economies

Using data from the Business Environment and Enterprise Performance Survey (BEEPS), this article investigates how foreign firms' involvement in corruption practices affects the innovation behaviour and performance of their direct competitors in transition economies of Eastern Europe and Central Asia. By unbundling corruption practices into grand and petty corruption transactions, this paper contributes to deepening the analysis of the 'grease the wheels' versus the 'sand the wheels' effects of corruption on innovation performance. Our empirical results indicate that grand corruption stifles the propensity of firms in the same line of business to conduct R&D activities and to bring new or upgraded products and services to the market, whereas petty corruption of foreign firms tends to foster major innovations in the domestic market. Domestic firms' involvement in petty corruption appears to be detrimental to innovation efforts and incremental innovation, but not to major innovation.