Corruption and Doing Business in Emerging Markets

Abstract

Corruption is a serious international problem with many damaging effects particularly in emerging market countries. We investigated to what degree overregulation and inadequate legal institutions contributed to corruption of small and medium-sized enterprises (SME) in emerging markets. Unlike other studies, we used data from the World Bank’s Doing Business annual series which provides indicators of the regulatory and legal environments facing SME. We had three major research questions. (1) Which government obstacles to conducting business in the form of overregulation and inadequate legal institutions contribute most to corruption? (2) Which are more closely linked to corruption, excessive regulations or weak legal institutions? (3) Which of the components, from which the World Bank’s indicators are derived, have the largest impact on corruption? We regressed Transparency International’s Corruption Perception Index on the nine World Bank indicators and five control variables for 51 emerging market countries from 2007 to 2015. This study concludes that all five regulation indicators, but only one of four legal indicators, contributed to corruption. While past studies have linked regulation and corruption, our contribution was identifying specifically which of the World Bank’s measures of the regulatory and legal environment cause corruption. In addition, our results also corroborate those of previous studies regarding our five control variables. Policy wise the World Bank has long advocated reducing regulations to improve SME operating efficiency. Our results further support such a policy because of its important additional benefit of reducing corruption and its many toxic effects.