Can Corruption Enhance Innovation? New Evidence from China’s Anti-Corruption Campaign

The bulk of extant literature suggests that corruption impedes innovation; however, we find evidence of the opposite of this in China, such that corruption in the form of grease money enhances corporate innovation. Our identification strategy exploits China’s anti-corruption campaign as a shock to corruption. Using a difference-in-differences model, we find that corrupt firms experience an 18.94% decrease in patent applications and a 17.30% decrease in patent approvals after the campaign relative to their peers. Additional tests of generalizability confirm a positive corruption–innovation relationship. The positive effects of corruption on innovation are more significant when firms have limited political power and connections. Government subsidies are underlying channels through which the campaign affects corporate innovation. Our evidence sheds light on the “greasing-the-wheels” perspective on corruption.