Bribery and Its Implications on Entrepreneurship in the Informal Economy: Evidence From Vietnam

Bribery and Its Implications on Entrepreneurship in the Informal Economy: Evidence From Vietnam

Phan Anh Tu (Can Tho University, Vietnam)
DOI: 10.4018/978-1-5225-3117-3.ch009

Abstract

This chapter argues that while informal entrepreneurship is important in transition economies (for economic growth, job generation, and welfare improvement), it opens informal entrepreneurs to bribery requests because of their non-official status. With empirical evidence from Vietnam, this chapter demonstrates that the likelihood of bribery is determined by a firm's attributes. Building on a unique dataset of 352 entrepreneurs in informal firms in Vietnam, this chapter is able to quantify bribery at the firm level and measure key concepts. The empirical findings confirm the key assumption that entrepreneurs operating in the informal sector of the same country may vary in their propensity to pay bribes due to pressure resulting from (a) factors that are specific to the firms, or (b) factors specific to their perceptions of the environment.
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1. Introduction

It is increasingly acknowledged that the informal sector is a large part of transition economies (Portes & Sassen-Koob, 1987; Williams & Nadin, 2010). For example, for Vietnam, our research context, the International Labor Organization (ILO) estimates that 20% of the Vietnamese Gross Domestic Product derives from the informal sector (Cling & Razafindrakoto, 2010). Studies of entrepreneurship in the informal sector aim to understand the strategy, structure and behavior of firms in this particular part of an economy from a micro perspective (i.e., a firm-level or individual-level approach). To some extent, the label ‘firm’ or ‘manager’ misrepresents informal activities given that household businesses or other forms of micro-organizations dominate the informal sector.

In this chapter, the informal sector or the informal economy are interchangeably used concept. We use ILO’s definition that the informal sector consists of all private unincorporated enterprises that produce at least some of their goods and services for sale or barter, are not registered and are not engaged in agricultural activities. In addition, much of the informal sector operates in rural areas and features low wages and labor-intensive firms. In contrast, the formal sector includes wage-labor and capital-intensive firms, and primarily operates in urban areas. Furthermore, we use Bruyat’s definition that entrepreneurship is about new value creation activities which can take place in new firms or existing firms (Bruyat & Julien, 2001). Informal firms or informal entrepreneurship in this research are also interchangeably used. They are non-registered firms, meaning that these firms do not register and apply for a business certificate in order to be legally approved by local officials while a firm can be understood as an officially registered unit and is hence approved by authority.

The contribution of this study is (or at least) twofold. First of all, this study contributes specifically to the informal entrepreneurship literature because it emphasizes the vulnerability of informal entrepreneurs to corruption. Moreover, Vietnam is one of the largest transition economies in the world and a so-called particular transition economy with the dual government mechanism (that is, a market economy and a government-led redistributive regime) which implies that government officials at all levels still have considerable power to influence business practice. We argue that although entrepreneurs in transition economies – that largely operate in the informal sector – are important for economic growth and employment, they are also vulnerable to bribery. For this reason, bribery is considered an impediment to poverty alleviation because it can increase transaction costs, making the economy less efficient, and also encourage entrepreneurs to stay small which prevents them growing and producing jobs which are helpful in reducing poverty. In transition economies, bribery is an enduring phenomenon that may partly explain both the existence of in the informal economy and the observed behavior in it. Transition economies may offer many opportunities to government officials to use regulations and rules to their own benefit. This may trigger firms to operate unofficially or to pay a bribe in exchange for their non-existence in official statistics and the accompanying benefits such as no or lower taxes. This said, not all entrepreneurs engage in bribery and there may be reasons other than the incentive to escape from bureaucracy that makes entrepreneurs more willing to pay a bribe.

Second, this research also contributes to the theory of corporate illegality (Baucus, 1994) in that this theory argues that in addition to motives and opportunities, there is a positive link between pressure and the likelihood of illegal corporate behavior. In addition to this, we argue that the characteristics of the environment and the firm can also create pressures that determine whether or not illegal behavior occurs. In addition, this research provides some preliminary evidence in support of a legalistic perspective (as mentioned in the literature part) on the emergence of an informal economy, in that very small (micro) firms may choose to operate in an informal economy because, for example, property rights protection or business registration requirements make it very difficult if not impossible to join the formal economy.

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