Open for innovation or bribery to secure bank finance in an emerging economy: A model and some evidence

In an emerging economy like China characterized by scarce financial resources, excessive red tape, and rampant corruption, firms are advised to bribe bank officials to grease the wheels of bank lending in order to secure the fund they need for innovation, business venturing, and growth. Drawing on the literature on corruption and open innovation, we develop a model to illustrate that bribery fails to ease bank lending when red tape is endogenous whereas openness for innovation smooths bank lending no matter whether red tape is exogenous or endogenous. Openness for innovation is more effective than bribery in helping a firm reduce red tape to secure bank finance. Based on a dataset of Chinese firms provided by the World Bank, our findings strongly support the argument. We find that openness for innovation has a positive relationship with both the access to bank finance and the size of bank finance, whereas bribery is related to neither. Supplementary tests further suggest that the positive relationship is mainly driven by private firms and manufacturing firms. Our findings help firms make decisions to select an effective and yet socially responsible approach to securing bank finance.