The Local Advantage: Corruption, Organized Crime, and Indigenization in the Nigerian Oil Sector

Abstract

Despite productivity advantages, multinational firms may operate less effectively than their local competitors in markets plagued by corruption and conflict. In natural resource sectors where firms face predation by armed groups, local firms may more easily engage in efficient corruption to buy law enforcement protection for their assets. I study a two-decade indigenization drive in Nigeria's turbulent oil sector, during which the share of local ownership grew substantially. Local takeover considerably increases oilfield output and reduces the share of nonproducing assets, despite evidence that local firms are of lower quality. Local firms increase output by reducing black-market activity: oil theft, maritime piracy, and militant violence all fall following local takeover. A simple bargaining model illustrates that political connections enable local firms to align law enforcement incentives, explaining their superior output performance. Data on anti-oil theft raids by government forces show that local firms receive preferential law enforcement protection. I find evidence that connections to high-level politicians and the security forces drive local firms' advantage in obtaining state protection and reducing criminal activity.