Business strategies and corruption in SMEs: The impact of business group affiliation, external auditing and international standardisation certification

Abstract

We examine the impact of three business strategies separately and in combination on the tendency for firms to engage in corruption. Using a sample of 56,827 firm-year observations for Small to Medium-sized Enterprises (SMEs) over the 2006-2018 period, we find that firms with business group affiliations are more likely to engage in corrupt practices in countries with low business freedom. However, those in countries with high business freedom are less likely to do so. We also find that firms that engage the services of external auditors and adopt international standardization are less likely to be corrupt, especially in countries with weak financial reporting standards. Our results also show that corruption intensity reduces even more for firms that employ the three strategies, whether we consider institutional factors or not. This result holds when we use a three-way interaction term. We conclude that the three strategies are mutually reinforcing, and that firm-level and country-level efforts complement each other in mitigating corruption.