Corruption as a Local Advantage: Evidence from the Indigenization of Nigerian Oil

Multinationals in the extractive sectors of weak states face resource theft by armed groups. 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 local firms’ participation substantially. Despite lower quality, local firms increase output by reducing oil theft. A bargaining model illustrates that political connections align law enforcement incentives, solving commitment problems. Data on law enforcement raids show that local firms receive preferential protection. Connections to military elites drive the local advantage. The aggregate gains from indigenization are at most between 2.3 and 5.7 percent of GDP. (JEL D73, F23, L71, O13, O17, Q34, Q35)