Countries with abundant natural resources often remain mired in conflict, corruption, and underdevelopment. Often overlooked, however, is the role of firms in these environments. Where the local private sector lacks the capacity for complex resource extraction, multinational investment, technology, and human capital may be required to exploit resource deposits. Multinationals are generally more productive than locally-owned firms and generate positive productivity spillovers via technology and human capital but they often find it challenging to operate in corrupt and conflict-prone markets. Local firms, on the other hand, may have the distinct advantage of political connections, or legal flexibility to protect assets and navigate politics. This project asks whether political affiliations enable local firms to outperform multinationals in corrupt natural resource sectors.
Rexer will study localisation of the Nigerian oil sector in the Niger delta, which experienced an armed uprising between 2000-2009 during and after which the share of oil output produced by local firms rose as multinational divestment increased. This trend was aided by a 2010 policy giving local firms preference in bidding on new oil licences. The project will first answer the question what were the effects of this wave of localisation on firms’ efficiency and conflict risk exposure by assembling oilfield-level panel data on output, oil theft, oil spills, violence, and ownership. Selection into local ownership is controlled for using a difference-in-differences specification that exploits within-field changes in ownership driven by divestment to local firms. To clarify the role of political connections, detailed data will be collected on the biographies of shareholders, managers, and board members for all oil companies in Nigeria. Political connections may confer numerous advantages - connected firms may lobby more effectively for police protection, or may use political “godfathers” as middlemen to bargain with criminal enterprises. To separate these mechanisms, data will be collected on enforcement actions taken by the Nigerian security forces against oil theft and militancy.
Local content policies are an increasingly popular tool to maximise the benefits of resource extraction captured by the host country. However, if the skills, technology, human capital, and financing to develop domestic resources are scarce, local content can reduce sectoral productivity and overall investment, ultimately proving counter-productive. At the same time, the severe political frictions faced by multinational firms may render localisation efficiency-enhancing. This is particularly the case in countries like Nigeria, where such frictions are strong and where a long history of multinational oil exploration has generated a substantial base of skills and technology in the domestic private sector. Ultimately, studies that rigorously estimate the sectoral productivity effects of localisation are scarce relative to the importance of this question for policymakers.
