Understanding whether and how corruption impacts firm productivity in China is crucial for promoting good governance of economic development. Based on our econometric model developed with China’s firm-level data, including detailed firm heterogeneity information and provincial records of government official-related corruption, we confirm that corruption acts as “sand” rather than “grease” in the wheels of firm productivity improvement. The hampering effect of corruption on firm productivity is not obvious for state-owned, relatively large-sized, and low productive firms, but it is quite significant for private, relatively small-sized, and high productive ones. More importantly, we find that a firm’s productivity gains from import liberalization are significantly inhibited by corruption. Therefore, if the institutional environment can be improved, firms in China possess great potential—especially private and small-sized firms—to be more efficient or be able to obtain more productivity gains from import liberalization
