Shoeb Mohammad, an assistant professor of strategy and entrepreneurship at Ontario Technical University, wrote his PhD thesis on corruption—but his interest in the field isn’t merely academic. In the early 1980s, before he was born, his parents left Pakistan for Canada because his father, an engineer and farm owner, faced relentless demands for bribes that made it impossible for the young couple to get ahead. “They talk about how difficult it was to get opportunities, to deal with the politics in the country, or regulation if you were starting a business. A lot of it boiled down to corruption,” he says. “That’s kind of what interested me.”
Lately, Mohammad has turned his scholarly attention to a longstanding academic disagreement and the subject of hundreds of somewhat contradictory studies: Does corruption grease the wheels of corporate innovation by helping companies avoid bureaucratic red tape, or throw sand into those gears because only the largest players can afford to buy off officials, creating staid monopolies? In a study published earlier this year in the journal Research Policy, Mohammad and two colleagues—Jie Yang, an assistant professor at the University of Manitoba’s Asper School of Business, and Irfan Butt, an associate professor at Toronto Metropolitan University’s Ted Rogers School of Management—conclude it’s the latter.
“The long-term impact of corruption on broader innovation in an economy will be unequivocally negative,” they argue, citing evidence that corruption tends to be bad for patents, R&D, citations and process improvements, especially in technologically intensive sectors and environmentally focused industries. “These findings affirm the question of whether privileged firms in corrupt environments are truly innovative, since monopolistic advantages can foster complacency by suppressing competition.”
Lots of research backs up that connection. A 2020 international ranking compiled by Swiss consultancy Global Risk Profile, for example, found that firms exposed to excessive corruption tend to become more risk-averse and cautious in their investments (although it notes China is an outlier that scores highly for both corruption and patents and R&D). Another 2020 study, by a team of scholars from the state universities of Arizona and North Carolina, suggests that whenever government officials have power and discretion over operating licences, safety inspections, building permits or approvals, bribery and extortion could price out investment in innovation “especially if these interactions are particularly costly, frequent or both.”
Yet, there’s a way of looking at this glass as half-full. In some instances, firms that are determined to innovate may seek to offset their risk by investing in a bit of, well, assurance. “For the innovating firm, the knowledge of how much to bribe and to whom for obtaining a licence may be superior to the uncertainty of not knowing if and when a licence will be granted,” Mohammad and his co-authors wrote, citing a 2017 paper on how some companies aim to capitalize on “non-market strategies,” such as insider knowledge.
The other forms of corruption that turn up in Mohammad’s research—cash bribes to local officials, pressure on senior government bureaucrats to favour certain firms or exclude others—may be more typical in emerging economies or kleptocracies, like Russia. However, his study raises provocative questions about Canada’s own record, particularly in light of our persistently poor track record with innovation, corporate R&D and productivity.
One piece of this puzzle is how we define corruption. The working definition is “an abuse of discretionary power for personal gain.” That includes stereotypical envelopes of cash to mid-level officials or hard-to-track deposits made to Swiss bank accounts, but there are more polite or acceptable forms of corruption, too.
For example, do shareholders of companies in highly protected sectors (such as food retail, airlines, and telecommunications) improperly benefit when those industries spend heavily to lobby for more robust protections or dispatch their own experts to work for regulators? How about dubious CSR practices, such as mining companies paying off local communities with new schools or hospitals to secure a permit to build a polluting mine? And what about the timidity of provincial securities regulators, who have for decades failed to properly police issuers and their well-connected investment bankers?
“Oftentimes what we define as corruption in another country, like Pakistan—similar sorts of activities may actually be happening within Europe or the United States, and we may call that legitimate,” says Mohammad.
Certainly, there have been high-profile examples of international Canadian firms (e.g., AtkinsRéalis, formerly SNC Lavalin) that have been nailed for dubious activities, such as lining the pockets of Libyan dignitaries. And we still face criticism about our lack of enthusiasm for enforcing the Corruption of Foreign Public Officials Act, which was only passed by Parliament in response to pressure from the U.S. and EU. Yet, intensive public and political scrutiny in recent years of the high degree of concentration in key sectors—as well as the price-fixing scandal involving Weston and several supermarket chains—does raise pointed questions about whether the dominant players in these industries are innovating. And if not, why?
“If corruption is benefiting some firms due to exclusion, it’s not going to create a robust ecosystem that will allow a country as a whole to get ahead in terms of innovation and economic activity,” says Mohammad. “Without strong competitive forces, it’s unlikely that companies are going to stay innovative for long periods of time.”
A recent case in point: signals from BYD, the Chinese EV giant, that it wants to enter North America. Following Canada’s multibillion-dollar investments in battery plants in recent years, the domestic auto sector sprang into action to advocate for steep tariffs to prevent BYD from selling low-cost EVs to Canadian consumers. While such moves will benefit incumbents, and potentially protect the federal and provincial investments in battery manufacturing, it’s likely these policies may also protect domestic firms from the kind of innovation-driven competition that forced the North American car industry to respond to existential threats from Japanese manufacturers in the 1980s.
There are even broader policy lessons to be gleaned from the research on innovation and corruption. According to the North Carolina/Arizona study, countries or regional governments that want to promote innovation need to go beyond funding R&D and drive institutional reforms that ensure a level playing field and squeaky-clean approvals processes. “In addition to direct incentives, such as tax credits and direct grants, simply investing in better-quality government and rooting out corruption can lead to more innovation,” it finds. A casual review of Ottawa’s recent spate of procurement scandals—ArriveCan being the choicest example—would suggest there’s plenty of work to be done in this arena.
Mohammad offers a few other takeaways. The federal government, he says, should recognize that when Canadian natural resources companies pay off local officials in remote offshore markets to secure operating permits, it is, in effect, harming smaller domestic firms in those countries, thus preventing them from accessing the benefits of economic growth.
As for Canada, he urges policymakers to take the long view when it comes to recognizing all the factors—explicit and subtle—that impede competition, including subsidies and sectoral protectionism. “How much corruption should be allowed or made permissible?” Mohammad muses. “It’s this idea that corruption is a part of the economic system. It helps grease the wheels of economic activity. But that is necessarily always a short-term perspective. If it’s leading to only some firms being strong, while the majority are weak, it’s not going to result in a strong innovation ecosystem that’s required for long-term productivity.”
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