Reinforcing the effects of corruption and financial constraints on firm performance: Normal versus crisis period in developing economies

Corruption and financial constraints are considered as crucial factors that can hinder firm performance in developing economies. The effects of these obstacles are discussed individually in the literature, but their combined effects are rarely addressed. This study uses firm-level data from 73 developing economies to examine the effects of these maladies on firm performance. We use instrumental variable estimators to overcome possible endogeneity issues and find that corruption and financial constraints hinder firm growth, employment, productivity, and innovation. Furthermore, we find that the combined effect of corruption and financial constraints deteriorates the growth of smaller businesses. Finally, we show that firms' sales and employment have suffered more due to corruption and liquidity crunches during the COVID-19 pandemic. Our results emphasized the exacerbating effect of these constraints in preventing firm growth and job creation in developing economies.