Resource Shocks, Corruption, and Local Business in Africa

Abstract

The negative correlation between growth outcomes and natural resource abundance is well-known. Researchers have proposed a number of channels - such as corruption, education, and conflict - through which resource rents may negatively affect growth in a society. We utilize a more nuanced approach and focus on the heterogeneous effect of resource rents on firms across different firm sizes. Specifically, we combine firm-level World Enterprise Survey Data with resource data across Africa from Berman et al. (2017). We find small firms suffer across a range of categories - including corruption - in response to positive exogenous resource shocks. Large firms, however, tend to benefit from resource shocks and experience less corruption and crime. These results are robust to a number of alternative specifications as well as a placebo analysis where resource shocks are randomly assigned to areas where the mineral in question does not exist. Our findings contribute to the understanding of how resource rents exacerbate the existing difficulties faced by small firms in the developing world.

Keywords: Corruption, Natural Resource Curse, Conflict, Large Firms, Small Firms

JEL Classification: D73, D74, O13