Despite advantages in technology and human capital, multinational firms may operate less effectively than their local competitors in markets plagued by corruption and conflict. Rexer studies the effects of divestment to local firms in the context of a two-decade indigenization drive in Nigeria’s turbulent oil sector, during which the share of local production grew substantially. Local takeover considerably increases oilfield output and reduces the share of nonproducing assets.
Local firms increase output by mitigating conflict risk: oil theft, maritime piracy, and violence by criminal-militant groups all fall following the local takeover. However, since local firms are less efficient, divestment leads to increased operational oil spills and gas flaring, magnifying the environmental externalities of oil production. A simple bargaining model illustrates that organized crime operates a protection racket, local firms’ lower bargaining costs allow them to buy protection more cheaply, explaining their superior output performance despite lower technical efficiency.
Rexer finds evidence that connections to high-level politicians and the security forces drive local firms’ advantage in reducing criminal activity.
View Jonah’s paper here.
Jonah Rexer is a PhD Candidate in the Business Economics and Public Policy department at Wharton. He studies organized crime, conflict, corruption, and multinational investment in resource-rich developing economies.
He has previously worked as a consultant for the Ministry of Finance and the World Bank in Myanmar, and as a researcher for BRAC in Uganda. He has an MPA/ID from the Harvard Kennedy School and a BA in International Relations from Stanford University.
