LAUSR

This paper examines the influence of tax administration corruption on different types of innovation inputs and outputs in Vietnam. It utilizes firm-level panel data derived from biennial surveys of small and medium sized enterprises (SMEs) in Vietnam from 2005 to 2015. In terms of estimation method, the study applies the control function method for a dynamic binary response panel data model with endogenous explanatory variables, state dependence, and initial condition problems simultaneously. The key estimation results confirm the grease-the-wheels hypothesis that petty tax corruption positively affects all types of firm innovative activities. It is further found that innovation outputs and machinery innovation input of an SME are positively determined by its innovation 2 years earlier and innovation in the initial period. The key finding of the study implies that it is a challenge for governments in transition economies to fight against tax corruption, especially for Vietnam, which is known to be a high tax collection, high tax effort country.