Innovation thrives on openness. Companies that share their research breakthroughs, development strategies, and technological advances often attract better investors, forge stronger partnerships, and accelerate industry-wide progress. Yet in some parts of the world, a troubling pattern has emerged: the most innovative companies are choosing to stay silent about their R&D activities, concealing rather than celebrating their technological achievements.

This paradox sits at the heart of new research that reveals how government corruption fundamentally alters corporate behaviour. When public officials abuse their power for personal gain, companies face an impossible choice: share information about their innovations and risk becoming targets for rent-seeking, or stay quiet and forfeit the market benefits of transparency.

The implications extend far beyond individual companies. When corruption forces firms to hide their innovation activities, it disrupts the knowledge-sharing mechanisms that drive economic growth, slows technological progress, and undermines the competitive dynamics that push industries forward.

The hidden cost of corruption on corporate innovation disclosure

Recent research revealed that companies headquartered in areas with higher levels of government corruption systematically reduced their narrative R&D disclosures. Led by Rui Huang from the Australian Government Department of Industry, Science and Resources, Associate Professor Xuejun Jiang from the University of Sussex, Dr Leonard Leye Li from UNSW Business School, Professor Louise Lu from the Australian National University and Professor Yangxin Yu from the City University of Hong Kong, the study examined how local corruption affected firms' willingness to share detailed information about their innovation activities.

“The primary catalyst for this research is the strategic dilemma firms face between satisfying the capital market's demand for transparency and managing the hidden risks of local corruption,” said Dr Li. “While the US government actively promotes the dissemination of R&D data to fuel economic growth, standard patent filings are often too technical and accounting statements too backward-looking to fully capture the business potential of innovation.”

Consequently, he observed that investors rely heavily on voluntary "narrative" disclosures – strategic explanations of progress and risks – to value these uncertain projects. However, he said this transparency creates a vulnerability: detailed information about future cash flows and project milestones can serve as a roadmap for corrupt officials seeking to identify deep pockets or "pressure points" for rent extraction. “Given that corruption remains a prevalent issue within the US, we wanted to investigate whether the fear of these predatory costs forces innovative companies to remain silent, effectively withholding critical information to avoid painting a target on their backs.”

Published in the Journal of Corporate Finance, the research analysed 72,392 firm-year observations from 1996 to 2018. They measured local corruption using conviction data from the US Department of Justice, tracking the number of public officials convicted for federal corruption offences in each judicial district. The researchers then examined how this corruption data correlated with the quantity and quality of R&D disclosures in company 10-K filings for their paper, The impact of local corruption on firms’ narrative R&D disclosures.

Subscribe to BusinessThink for the latest research, analysis and insights from UNSW Business School

Their methodology involved sophisticated text analysis of annual reports, counting R&D-related sentences and categorising them based on whether they contained numerical information or forward-looking statements. The team controlled for various factors, including firm size, leverage, actual R&D spending, and local economic conditions, to isolate the effect of corruption on disclosure practices.

Why corrupt environments discourage innovation transparency

The researchers found that firms in more corrupt areas included fewer R&D-related sentences in their regulatory filings, and these sentences contained less numerical and forward-looking information. Disseminating research and development (R&D) information is essential for stimulating economic growth, a principle strongly upheld by the US government, the authors noted, highlighting the broader economic implications of reduced disclosure.

The research uncovered a troubling pattern: companies operating in corrupt environments faced a difficult trade-off. While sharing detailed R&D information could reduce information asymmetry and lower their cost of capital, it also made them more vulnerable to rent-seeking by corrupt officials.

"Sharing detailed narrative R&D information can raise the risk of rent extraction by corrupt government officials, as these disclosures make it easier for them to identify potential targets, locate pressure points, and estimate a firm's ability to pay," the authors explained. This finding suggests that corruption creates an invisible tax on innovation transparency, forcing companies to choose between market transparency and protection from corrupt officials.

The effects were particularly pronounced for firms with operations concentrated in their headquarters states. These companies, unable to easily relocate their operations, found themselves with less bargaining power against corrupt officials and consequently reduced their R&D disclosures even further.

Political connections as a shield against disclosure pressure

Interestingly, the research revealed that not all firms responded equally to corruption pressures. Companies whose CEOs were politically aligned with their state's incumbent party experienced a smaller reduction in R&D disclosures. This political alignment appeared to provide some protection against corruption, allowing these firms to maintain greater transparency in their innovation activities.

The study also found that when R&D disclosures were closely tied to future profitability, companies in corrupt areas became even more reluctant to share information. This suggests that corrupt officials specifically targeted information that could help them identify financially successful firms. “The study reveals that local corruption functions as a calculated ‘predatory tax’ on success, where officials specifically target firms signalling strong future profitability and ‘deep pockets’ for rent extraction,” said Dr Li. 

Learn more: When workers catch a flu, corporate disclosure catches a cold

“This dynamic creates an uneven playing field where ‘captive’ firms with geographically concentrated operations are silenced by their lack of bargaining power, while firms with CEOs politically aligned with the state's incumbent party enjoy a protective shield that allows them to remain transparent. Crucially, this strategic silence is not a symptom of unethical corporate contagion but a rational cost-benefit decision to protect the firm's assets, though it ultimately comes at the cost of stifling the knowledge dissemination necessary for broader economic growth.”

Implications for business leaders

While this research focused on US firms, the findings offer important lessons for companies and policymakers worldwide. As businesses increasingly operate in international markets with varying levels of governmental integrity, understanding how corruption affects corporate disclosure becomes crucial for strategic planning.

The research highlights the importance of considering local governance quality when deciding on the location of R&D facilities or headquarters. Companies should recognise that operating in areas with weak governance structures may force them to limit transparency, potentially increasing their cost of capital and reducing their ability to attract innovation partnerships.

The findings also suggest that building legitimate political relationships and maintaining strong governance practices can help shield companies from corrupt pressures. However, firms must balance this approach carefully to avoid creating dependencies that could compromise their integrity.

Learn more: What is the hidden cost of clean technology secrecy?

Most importantly, the research underscores how corruption creates hidden costs that extend far beyond direct bribes or regulatory delays. By forcing companies to reduce transparency about their innovation activities, corruption undermines the very knowledge-sharing mechanisms that drive economic growth and technological progress.

For corporate leaders operating in regions with elevated public corruption, Dr Li said the research suggests treating narrative R&D disclosures as a strategic vulnerability, rather than a mere compliance routine. “Managers – especially those leading ‘captive’ firms with geographically concentrated operations – should carefully weigh the capital market benefits of reducing information asymmetry against the risk of painting a target on their backs for rent-seeking officials.”

While political alignment with incumbent parties appears to offer a protective shield, he said that firms lacking such cover should exercise caution when linking innovation progress to future profitability, as these details can unintentionally reveal ‘pressure points’ for extortion. “Ultimately, investors and regulators must recognise that 'strategic silence' in these environments is often a rational survival tactic to protect firm assets, even though it comes at the cost of stifling the knowledge diffusion necessary for broader economic growth,” Dr Li concluded.