Entrepreneurship, innovation, and corruption ☆ Sergey Anokhin a, ⁎ ,2 , William S. Schulze b, 1 ,2 a Graduate School of Management, Kent State University, Kent, Ohio 44242 b David Eccles School of Business, The University of Utah,1645 East Campus Circle Drive, Salt Lake City, UT 84112-9304, United States article info abstract Efforts to control corruption increase levels of trust in the ability of the state and market institutions to reliably and impartially enforce law and the rules of trade. Such trust facilitates the development of arms-length trade and the coordination of complex economic activities. We posit that better control of corruption will also be associated with rising levels of innovation and entrepreneurship. Absent such trust, however, monitoring and other transactions cost should restrict the scale and scope of trade and thus, hamper productivity and investment in innovation and entrepreneurship. Longitudinal data from 64 nations lends support to our propositions, thus helping unpack the puzzling relationship between entrepreneurship, innovation, and corruption. © 2008 Elsevier Inc. All rights reserved. Keywords: Entrepreneurship Innovation Control of corruption 1. Executive summary What effect does corruption, typically defined as abuse of public power or authority for private benefit(Rodriguez et al., 2006), have on entrepreneurial and innovative activity across nations? Interestingly, and despite the fact that a growing stream of research documents a uniformly positive relationship between the control of corruption and improvement in a variety of important indicators of economic welfare including foreign direct investment (Lambsdorff, 2003; Mauro, 1995), productivity (Lambsdorff, 2003; Rivera-Batiz, 2002), the United Nations' Human Development Index (Rose-Ackerman, 2004), and growth in income (Kaufmann and Kraay, 2003), the relationship between the control of corruption and cross-national rates of entrepre- neurship and innovation has received scant attention. In this paper, we draw on the political economic (e.g. Barro, 1991, 1996; DeSoto, 1989; Olsen, 1996; Romer, 1986, 1994; Rose- Ackerman, 2001, 2004), corruption (e.g., Kaufman and Kraay, 2003; Lambsdorff, 2003; Mauro, 1995), strategic management (e.g., Rodriguez al., 2005; Uhlenbruck et al., 2006), and entrepreneurship/innovation literatures (e.g. Acs and Audretsch, 1988; Audretsch and Feldman, 1996; Baumol, 1990; Dosi, 1988; Thursby and Thrusby, 2002) to argue that corruption undermines the foundations of institutional trust that are needed for the development of trade and entrepreneurial and innovative activity. We argue that the decision to pursue an entrepreneurial or innovative opportunity depends on “the portion of the value that the venture creates that the entrepreneur is able to capture for their own purposes” (Baker et al., 2005: 497). But when corruption is present, entrepreneurs and innovators face greatly increased risk that those involved in her value chain will be opportunistic and appropriate profits to which the prospective entrepreneur is entitled. And in the absence of impersonal enforcement of the law, it becomes risky to rely on legal contracts and/or signals about the reliability and integrity of the providers upon whose services and goodwill entrepreneurs and innovators must rely. Trust’s alternative foundations like affect, kinship, or ethnic identity are economically inferior because they necessarily limit the size of the provider pool and expose promising entrepreneurs to greater risk of adverse selection (Alchian and Woodward, 1988). Corruption also creates disincentives for investment in innovation and Journal of Business Venturing 24 (2009) 465–476 ☆ We wish to thank the editors, reviewers and participants from the Journal of Business Venturing Conference on Ethics and Entrepreneurship for their comments and suggestions on earlier version of this manuscript. ⁎ Corresponding author. Tel.: +1 330 672 2750. E-mail addresses: sanokhin@kent.edu (S. Anokhin), william.schulze@utah.edu (W.S. Schulze). 1 Tel.: +1 801 983 7446. 2 Authors contributed equally and are listed in alphabetical order. 0883-9026/$ – see front matter © 2008 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusvent.2008.06.001 Contents lists available at ScienceDirect Journal of Business Venturing