ABSTRACT : This study aims to test the contrasting hypotheses that corruption hinders or boosts firm investment using firm-level data of Vietnamese small and medium enterprises. Firm investment dummy is used as the dependent variable while independent variables include the firm corruption dummy and variables of firm characteristics, and owner/manager characteristics. As corruption and investment may be endogenous, leading to biased estimates, we employ both a simple logistic regression model and a bivariate probit model with a corruption instrument to go around the potential issue of endogeneity. We find evidence to support the hypothesis that corruption hinders firm investment and therefore, this may be a mediating channel leading to the negative effect of corruption on firm performance.

KEYWORDS – Bivariate probit model, Corruption, Firm investment, Vietnam