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The sanding effect of corruption on entrepreneurship

[ad_1] Charles Zhuwau THERE is consensus among scholars, entrepreneurs and policy-makers that the prevalence and nature of entrepreneurship is defined by the prevailing blend of factors in a society. Such factors include institutional frameworks, resource endowment, entrepreneurship education and training, availability of capital, and corruption. These factors determine allocation of productive, unproductive, and destructive enterprising […]


Charles Zhuwau

THERE is consensus among scholars, entrepreneurs and policy-makers that the prevalence and nature of entrepreneurship is defined by the prevailing blend of factors in a society. Such factors include institutional frameworks, resource endowment, entrepreneurship education and training, availability of capital, and corruption.

These factors determine allocation of productive, unproductive, and destructive enterprising activities even if there was a uniform distribution of entrepreneurs across all countries.

This article focuses on how entrepreneurship activity level of a country like Zimbabwe can be shaped by corruption — the misuse of public office for personal benefit.

Corruption exists across all countries in the world, but at different levels. Transparency International, a global body that deals with the fight against corruption and enhancement of transparency and integrity acknowledges this with its annual corruption measurement reports (corruption perception index — CPI), which has not exonerated any country as corruption free since its launch on May 4, 1993.

It is important to note that there are two opposing views concerning the impact of corruption on entrepreneurship. While one school of thought construes corruption to “grease the palm” or facilitate entrepreneurship, the other interprets it as a “sander” or inhibitor of entrepreneurship.

The argument for the former is that corruption helps to circumvent bureaucratic business environments. Here, corruption facilitates entry of enterprises in economies with rigid and inefficient public administrations, which impose inconvenient regulations and procedural requirements when establishing business.

However, the “greasing the wheels” premise has been very difficult to substantiate with empirical studies conducted in various countries finding corruption to be detrimental to entrepreneurship.

With varying prevalence of corruption across countries, its negative impact on entrepreneurship varies from one nation to the other, with overwhelming damage in less developed markets. As developing countries experience endemic corruption due to weak institutional frameworks, this has consequences to entrepreneurship type, quality and volume.

Corruption and entrepreneurship type

Research has proven that corruption positively correlates with informal entrepreneurship. This means that societies with high corruption experiences excessive “off-the-book” business practices, and this is the Zimbabwean situation.

According to the Transparency International report of 2020, Zimbabwe is ranked among top corrupt nations with a CPI of 24/100 and on position 157 out of 180 least corrupt countries. While experiencing rampant corruption, the country’s economy is highly informal. In 2019, the International Monetary Fund (IMF) scored Zimbabwe’s informal sector at 60,6% of the total country economic activities, which is above the global average of 31,9%, number one in Africa, and on position three in the world after Georgia (64,9) and Bolivia (62,3). The question to ask is: How does corruption lead to informality?

Researchers have come up with convincing explanations to corruption-informal entrepreneurship nexus. In high corrupt economies, the “devil’s circle” scenario happens where corruption becomes inescapable when entrepreneurs want to exploit highly visible opportunities.

The opportunities attract the attention of authorities who will incorporate entrepreneurs into corruption through increasing costs of time, regulations and procedures required to exploit them.

This will be a clear signal to business that payment of bribes is the password to access such opportunities. As a result, two situations create shadow operations.

First, when entrepreneurs carry out cost benefit analysis and find out that there is higher marginal savings in not paying bribes than paying, they opt to keep part or all their operations small and “off-the-book” to escape public officials’ corruption radar. This also shows that corruption can result in small business operations.

The second one is incapacity induced informality. Here, even if entrepreneurs are willing to pay bribes to have access to opportunities on the market, their inability to pay backhanders especially to obtain licences and/or bypass excessive regulations leave them with operating informally as the only option. The task I will leave you with is to relate this to the Zimbabwean situation.

Corruption and quality of entrepreneurship

Corruption negatively correlates with innovation. Entrepreneurs invest resources to create high-value-added goods and services, be they out of novel or improvement of existing ideas and processes. The decision to invest resources for a cause is depended on the assurance that the entrepreneur will benefit fully from the value of the proceeds of his/her venture creation.

With corruption the entrepreneur faces increased risk that opportunists will appropriate profits and rents entitled to the entrepreneur due to information asymmetry inherent in complex economic activities.

Thus, morale decay demotivates innovation by making it difficult for entrepreneurs to capture full proceeds of their innovation while awarding unscrupulous behaviour handsomely. With difficulties in payoffs, cost to monitor, and timeframe associated with embarking on innovative and complex business activities, Anokhin and Schulze (2009) argue that corruption disincentives innovation due to uncertainty of the entrepreneur reaping proceeds of own effort.

Therefore, a corrupt-ridden nation faces a reduction in innovative and productive enterprising activities in favour of rent-seeking and unproductive entrepreneurship.

Corruption and volume of entrepreneurship

The main reason why corruption is viewed in “sanding the wheels” notion is its impact of reducing entrepreneurship activities in countries. Corruption diminishes enterprising culture in three main ways.

First, in countries with high corruption, entrepreneurs are viewed negatively in society. They normally feature in front pages of newspapers for information leaks of them benefiting from multi-million and billion-dollar sady deals with corrupt government officials. This is typical for Zimbabwean politically connected businesspeople. When business corruption scandals enter public domain, people tend to view entrepreneurs as dishonest persons who accrue their wealth through crooked ways. This can discourage some individuals from pursuing entrepreneurship.

Second, with corruption awarding rent-seeking behaviour, it curtails entrepreneurial spirit and ambition of those waiting on the fence to embark on the journey. Incorruptible individuals get demoralised and leave the turf to morally defunct people.

Finally, corruption imposes barriers to entry in certain industries and/or markets. It blocks firms from participating in two ways. On one hand, corruption add costs on top of actual business operating costs, which can go beyond the reach of start-ups. In such circumstances, potential entrepreneurs may fail to launch business due to lack of capital to finance corruption costs. On the other hand, corrupt officials demand bribes from businesses with the assurance of protecting them from competition. When new firms want to enter some industries and/or markets, they are blocked from participating due to them failure to either outbid existing bribe payers or break a technical barrier. Thus, the result is that few players are enabled to operate and profit from certain industries and markets.

From this discussion it is clear that corruption sands the wheels of entrepreneurship. It shapes the type, quality and quantity of entrepreneurship. Where corruption is high, informal, unproductive, and rent-seeking entrepreneurial activities thrive at the expense of formal, highly productive and innovative entrepreneurship. Furthermore, entrepreneurial activities fall due to the power of corruption in limiting entrepreneurial ambitions of individuals and imposing costs on start-ups, which act as barriers to new firm entry. Having exposed entrepreneurship-corruption nexus, the fight against corruption must be a top priority of Zimbabwean authorities if the country is to experience an improved entrepreneurial activity level.

Charles Zhuwau is an entrepreneurship and business development expert. He is also a lecturer at The Centre for Entrepreneurial Studies at Midlands State University

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