Corruption, trade liberalization and firm productivity: Evidence from Vietnam

Abstract

This paper investigates how corruption influences the gains from trade liberalization. Using firm-level data from Vietnam from 2000 to 2012, which includes the country’s accession to the World Trade Organization (WTO), the analysis provides robust causal evidence, based on fixed effects and instrumental variable estimation techniques, that corruption mitigates the positive impact of tariff reduction on firm productivity. One key mechanism through which corruption may limit productivity is by reducing importing. The paper shows that the likelihood of importing following input tariff cuts is lower for firms in provinces with higher corruption. We examine the broader implications of our firm-level findings and show that, in a counterfactual scenario without corruption, Vietnam’s productivity gains from trade liberalization would have been higher.