as a result of the OECD’s anti-bribery convention.<sup>12</sup> Firms with a larger share of state ownership may have beneficial ties with the procuring agencies that increase their likelihood of bidding, and reduce their need to pay bribes.<sup>13</sup> In bidding regressions, we control for two additional firm-level variables. The first is a dummy indicating whether or not the firm has an internationally recognized quality certification, which may either reflect or give it advantages over other firms. The second is the share of the firm’s sales that are national, i.e. not exported, directly or indirectly. We expect firms producing mostly for export markets will be less likely to bid on public contracts.<sup>14</sup> We also control for sector or industry with 53 dummy variables. Some sectors have larger procurement markets than others, so more potential bidding firms. Sectors (such as construction) that involve “large, complex, non-standard activities in which quality can be very difficult to assess” are more vulnerable to kickbacks and other corruption schemes (Kenny, 2009).<sup>15</sup> Country-level controls include (log of) per capita income, size (log of population and log of land area in square kilometers), and aid (log of per capita official development assistance). These and other country-level controls used later in robustness tests are all lagged by one year.

Higher income and size are rough proxies for market size so may be positively correlated with the likelihood of bidding for public contracts. Smaller markets may facilitate collusion among firms, or between firms and procuring agents. Interactions between officials and suppliers are more likely to involve ties between family and friends, so may increase the number of improper awards but perhaps not with any direct informal payments being made. In micro-states with extremely limited public sector capacity, it may not be possible in many cases to separate the various functions of procurement systems among different officials, as “good practice” recommends (OECD, 2009: 57, 72). In larger countries, however, a larger share of procurement transactions may occur at sub-national levels using weaker systems; if so, area and population may be positively associated with kickbacks. Countries with higher incomes tend to have higher scores on the PEFA procurement indicator (De Renzio, 2009),

> 12 See http://www.oecd.org/corruption/oecdantibriberyconvention.htm.

> 13 The survey excludes enterprises that are 100% state owned.  About 1 in 60 firms in our sample have some state ownership, but only 40 firms (out of more than 33,000) are majority state-owned.  About 14% of firms have some foreign ownership, and about 2% are wholly foreign-owned.

> 14 This control variable is not exogenous, however, as successful bids will increase the non-exported sales share.

> 15 Based on surveys of business executives around the world, Transparency International’s “Bribe Payers Index” ranks 19 sectors with respect to the incidence of bribery, with bribery least frequent in agriculture and light manufacturing, and most frequent in public works and construction. See http://www.transparency.org/bpi2011/.

13