This paper examines the relationship between corruption and transaction costs, as
measured by asset specificity and innovation in Africa. We hypothesize that in the
context of developing countries in Africa, corruption is significantly associated with
innovation, and that this relationship is mediated by transaction costs, including
physical asset specificity and human asset specificity. We test our hypotheses by
means of a multiple mediation model. We use the product-of-coefficients approach
and bootstrapping techniques to estimate firm-level data from the World Bank
Enterprise Survey and Innovation Follow-up Survey for five countries in Sub-Saharan
Africa. We find that corruption is positively associated with innovation, and that
asset specificity positively mediates this relationship. We conclude that the positive
relation between corruption and innovation offers support to the “grease-the-wheels”
hypothesis. Furthermore, transaction costs involving physical asset specificity
increase the likelihood of innovation in a business environment characterised by
corruption, an indicator of poorly functioning institutions. Hence, policies focusing
on strengthening institutions are likely to be beneficial for controlling corruption and
stimulating innovation Lastly, policies pertaining to tax incentives related to physical
asset investments are crucial for enhancing innovation.
