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

Abstract

Multinationals in the extractive sectors of weak states may face resource theft by armed groups. This criminality is often abetted by state corruption, even though firms are willing to pay for protection. I study indigenization in Nigeria's oil sector, which increased participation by Nigerian firms substantially. Despite evidence that local firms are of lower quality, localization increases output and reduces oil theft. A bargaining model illustrates that political connections align law enforcement incentives, solving commitment problems. Data on raids by government forces show that local firms receive preferential law enforcement protection. I find that connections to military elites drive the local advantage.

Keywords: foreign investment, hydrocarbons, political risk, organized crime, black markets, conflict, law enforcement, corruption

JEL Classification: F2, L24, Q34, Q35