The enduring effect of formalization on firm-level corruption in Vietnam: The mediating role of internal control

Abstract

In the past, the question whether formalization and internal control systems can be employed by firms as anti-corruption measures has received little attention. Based on a unique panel dataset of Vietnamese SMEs, this paper finds that when enterprises formalize, they have to pay more in bribes. The evidence supports the hypothesis that a legitimate corporation with a high level of visibility is more likely to feel constrained to pay bribes. Internal control, on the other hand, reduces bribe payments and legal breaches. Effective internal control mechanisms also reduce the favorable correlation between formalization and bribe payments. This suggests that in the absence of effective institutions, firms should develop appropriate internal control mechanisms to prevent the harm caused by bribery.