Corruption hurts local innovation

As South Africa grapples with growing the economy and sustainable socio-economic development, it is often said that innovation is the silver bullet to help the country achieve its developmental goals. Dr Alexis Habiyaremye writes about how corruption stifles innovation.

Innovation can significantly improve the lives of millions of poor South Africans and their chance for economic participation, through the provision of better and cheaper goods and services, in health, transport, and e-government. It can help South Africa diversify from its traditional commodity-based economic model, which has not led to the reduction of inequalities in recent decades. According to the World Bank’s South Africa Economic Update released in September 2017, innovation can raise South Africa’s competitiveness, allow for breaking into new markets and create jobs.

Foreign investment and corruption
In a 2002 study entitled, ‘Foreign Direct Investment for Development: Maximising Benefits, Minimising Costs, the Organisation for Economic Co-operation and Development’ wrote that “a preponderance of studies shows that foreign direct investment triggers technology spillovers [which] helps create a more competitive business environment and enhances enterprise development. All of these contribute to higher economic growth, which is the most potent tool for alleviating poverty in developing countries”.

The HSRC and Wladimir Raymond from Statec Luxemburg recently published a study entitled ‘How do foreign firms’ corruption practices affect innovation performance in host countries? Industry-level evidence from transition economies’. They looked at the question of how corruption impacts on technology transfers, research and development, and innovation and found that trans- and multinationals do not necessarily support local research, development and innovation.

Looking at 30 countries
We used data from the fourth wave of the European Reconstruction and Development Bank’s World Bank Business Environment and Enterprise Performance Survey. This survey was launched in 2008-2009 to collect data for the 2005-2007 period using approximately 12 000 enterprises in 30 countries from Eastern Europe and Central and Western Asia. To understand corruption at industry level, we distinguished between grand and petty corruption.

Grand corruption refers to large-scale corrupt acts involving important government officials, including those who make decisions about public procurement contracts. Petty corruption usually involves the payment of ‘speed money’ to ‘grease the wheels’ or ‘to get things done’ in cases where inefficient bureaucracy or complex regulations impede a business transaction. We also looked at the roles of domestic firms versus foreign firms in the host economy.

We found that an increase in foreign firms engaging in grand corruption in an industry discourages investment in research and development, reduces the likelihood of upgrading existing lines of products and/or services and stifles the development of new products or services for all firms in the same industry.

An increase in the proportion of domestic firms with petty corruption activities decreases the likelihood of research and development and incremental innovation. Speed money (bribery) paid by foreign firms supports better innovation output which is imported from the home country. The innovation outputs and research and development in the host country is therefore unaffected while there is an absence of the transfer of skills and knowledge.

The significance of this study is that this is the first time that corruption has been categorised in this way to assess the impact on local innovation and research and development.

Implications and recommendations
Our study finds that transnational corruption is detrimental to innovation in host countries, but benefits foreign firms that are involved. Since their corrupt behaviour in host countries affects primarily innovation efforts and incremental innovation, this puts non-corrupt domestic firms in host countries at a disadvantage as research and development is the most important input to new and improved products. 

Subsidiaries of multi-national enterprises can rely on their access to foreign technologies for the innovative outcomes in their host countries and reap the benefits of corruption without bearing its full costs.

With these insights in mind, it will be important for countries to be more vigilant about the impact of corruption on actual investments in domestic research and development, innovation and technology transfers. Efforts to tackle corruption must be directed not only towards local officials but also towards foreign corporate managers.

This will be crucial as South Africa prioritises building the requisite capacity to move into the digital economy to access the opportunities presented by the 4th Industrial Revolution.

Dr Alexis Habiyaremye, researcher in the HSRC’s Economic Performance and Development programme

The full study is offered by Taylor and Francis in free access and can be found at: