Trade facilitation costs and corruption: Evidence from China

This paper focuses on a less-studied corruptive behavior hidden in trade facilitation costs. We use Chinese firm-level data to identify systematic variations in entertainment and travel costs (ETCs) across different trading markets and trading partners. We find that ETCs significantly increase when the firms sell to more distant domestic markets but sharply drop when firms export to international markets. Moreover, ETCs are significantly higher when the firms sell to government-run and state-owned enterprises than other trade partners. We argue that this discontinuity in ETCs is the consequence of regional market segmentation and local protection in China. In regional tournaments, local officials tend to impose trade barriers in order to prevent competition from other regions, and ETCs include significant “grease money” to overcome domestic trade barriers. Our study suggests that internationalization provides an opportunity for emerging economy firms to escape weak institutional environments.