The Perceived Impact of Public Sector Corruption on Economic Performance of Micro, Small, and Medium Enterprises in a Developing Country

Abstract

Micro, small, and medium enterprises (MSMEs) contribute to the economic development of most developing countries. However, the economic performance of the MSMEs is often restricted by several obstacles. This paper reports on a study of the impacts of public sector corruption on employment growth in MSMEs, as perceived by their managers/owners. The data originated from a nationwide survey that involved MSMEs managers/owners in Papua New Guinea (PNG) that were selected by a stratified random sampling technic. The data was analyzed using a two-stage least squares (2SLS) regression model. The results show that MSME managers/owners perceive that corruption in the public sector is generally linked to an increase in employment growth in their firms. Medium-size enterprises benefit most from corruption in the public sector, whereas small-size firms appear not to benefit. The findings indicate that other than corruption, there might be failures in the public institutions that are hampering the competitiveness, innovations and efficiency in MSMEs. Corrupt practices can precipitate the loss of revenue that would have accrued to the government from tax that could be used to provide facilities required by the public institutions. Corruption in the public institutions of developing countries such as PNG can be tackled by implementing strategies that promote zero-tolerance for corruption. These include promoting public awareness of the cost of corruption to the country’s economy, improvement in the quality of governance, and expanding the capacity of government agencies for effective and efficient service delivery. Increasing the penalty for engaging in corrupt practices could also be considered, while people who engage in practices that discourage corruption should be rewarded. The findings contribute to a potential strategy that could be used to promote ease of doing business in a country by considering the obstacles that MSMEs face.