Natural resource endowment and firm performance: The moderating role of institutional endowment

• Published date: 01 November 2018
• Author: David B. Zoogah
• DOI: http://doi.org/10.1002/gsj.1169
• Date: 01 November 2018

RESEARCH ARTICLE

Natural resource endowment and firm

performance: The moderating role of

institutional endowment

David B. Zoogah

Department of Management and Entrepreneurship,

Williams College of Business, Xavier University,

Cincinnati, Ohio

Correspondence

David B. Zoogah, Department of Management

and Entrepreneurship, Williams College of

Business, Xavier University, 3800 Victory

Parkway, Cincinnati, OH 45207.

Email: zoogahd@xavier.edu

Research Summary: Does institutional endowment

moderate the relationship between natural resource abun-

dance and firm performance? Drawing from institution-

based theories (IBT), we examine the interactive effects

of institutional endowment (as indicated by natural

resource governance) on firm performance. We use 2013

data of 492 firms from 27 African countries and multi-

level techniques to find significant interactions of institu-

tional endowment. We discuss the theoretical and

practical implications of these findings for management

and organization scholarship.

Managerial Summary: The purpose of this study is to

examine the extent to which firm performance differs

across countries in Africa as a function of institutional

factors given natural resource abundance. We find that

firm sales are higher in countries with strong institutions,

strong enabling environments, and strong safeguards and

quality controls when natural resource abundance is high.

When natural resource abundance is low, firm sales and

net profits are higher in countries with strong reporting

practices, and profit margins are higher in countries with

strong safeguards and quality controls.

KEYWORDS

Africa, firm performance, governance dynamics,

institutional theory, natural resource curse, natural

resource blessing

Received: 12 October 2015 Revised: 17 March 2017 Accepted: 6 April 2017

DOI: 10.1002/gsj.1169

Copyright © 2017 Strategic Management Society

578 wileyonlinelibrary.com/journal/gsj Global Strategy Journal. 2018;8:578–611.

1|INTRODUCTION

Since the beginning of the 21st century, African economies have been experiencing economic

growth fueled “predominantly based on extracting natural resources.”

1

Africa has a large quantity of

natural resources, including agroforestry, petroleum, and minerals, and it ranks first or second in

quantity of world reserves of bauxite, cobalt, industrial diamond, phosphate rock, platinum-group

metals (PGM), vermiculite, zirconium, and gold. The 2012 share of world production from Africa

was 60% of cobalt; 56% of natural diamond; 38% of chromite; 38% of zinc; 21% of phosphate rock;

20% of gold; 18% of uranium; 12% of mineral fuels (including coal) and petroleum; 9% of copper;

7% of bauxite; and 5% of aluminum (Yager et al., 2012).

Yet, research shows conflicting effects of natural resource abundance. On the one hand, natural

resource abundance is a blessing for countries because it yields positive outcomes. Leke, Lund, Rox-

burgh, and Van Wamelen (2010) noted that soaring prices for oil, minerals, and other commodities

have helped lift GDP since 2000, and internal and external trends indicate that Africa’s economic

prospects are strong in the long term. Lane and Reggio (2013) observed that the contribution of nat-

ural resources probably accounts for increased explorations for minerals and petroleum in Africa,

resulting in more hydrocarbon reserves being discovered in Eastern, Western, Central, and Southern

Africa than in any other part of the world from 2010 to 2013.

2

Botswana, which used to be one of

the poorest countries in Africa prior to discovery of its diamonds, now has the second-highest public

expenditure on education as a fraction of GNP; has enjoyed the world’s highest growth rate since

1965; has GDP per capita that is at least 10 times that of Nigeria (Gylfason, 2001; Sarraf & Jiwanji,

2001); and its diamonds contribute 40% of GDP. These positive effects have empirical validity.

Brunnschweiler (2008, p. 399) found “a positive direct empirical relationship between natural

resource abundance and economic growth.”Van de Ploeg (2006) also observed that because natural

resources can facilitate industrial growth, they represent opportunities for African countries.

On the other hand, natural resource abundance represents a curse because it is associated with

negative social, political, and economic outcomes (Auty, 1993; Humphreys, Sachs, & Stiglitz, 2007;

Ross, 1999, 2001). The McKinsey Global Institute (MGI) indicates that natural resources accounted

for only about a third of the new found growth of African countries.

3

Since 2015, the softening of

commodity prices has resulted in sluggish growth in some of the continent’s biggest markets, caus-

ing some to call into question the “Africa rising”narrative of recent times (Rowden, 2013). For

example, Ghana’s budget shortfall in 2011 and 2012 resulted from low oil returns, a situation that

worsened its economic growth.

4

Empirical evidence also suggests negative effects. Sachs and

Warner (1995) found a negative association between natural resource abundance and economic

growth in a large cross-country study. Sala-i-Martin and Subramanian (2003, p. 1) also found that in

Nigeria, oil and minerals “exert a negative and nonlinear impact on growth via their deleterious

impact on institutional quality.”

These different outcomes are attributed to differential levels of natural resource abundance and

institutional strength (see Humphreys et al., 2007). Endowed countries that have strong institutions

(e.g., Botswana) tend to have more positive economic outcomes than those that have weak institu-

tions or low natural resource endowment (e.g., Democratic Republic of Congo) (Stiglitz, 2007).

Unfortunately, it is not clear how these outcomes relate to firms because of the paucity of studies in

1

http://www.nytimes.com/2014/08/01/opinion/africa-needs-science-not-aid.html?_r=0.

2

http://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/us-er-2013-oil-and-gas-conference-retrospective-1030

2014.pdf.

3

www.mckinsey.com/mgi.

4

http://allafrica.com/view/photoessay/post/post/id/201307120003.html#2.

ZOOGAH 579

the extractive sector in general (Shapiro, Hobdari, & Oh, 2015) and in Africa in particular (Zoogah,

Peng, & Woldu, 2015). Even though it might be argued that natural resource endowment—the bene-

faction of a country in physical assets, such as precious minerals, oil, and agroforestry, that have

superior revenue potential—may spill over to firms negatively (Auty, 1993; Collier, 2007; Sachs &

Warner, 2001; Stiglitz, 2007) or positively (Brunnschweiler, 2008; Van de Ploeg, 2006), it is likely

there may be no effect because firms differ across countries.

Second, differences in institutional endowment across African countries may call into question

the main effects and intervening mechanisms identified at the national level (Leite & Weidmann,

2002; Nelson & Sampat, 2001; Rodrik, Subramanian, & Trebbi, 2004); as contingencies, institutions

either vitiate or enhance performance of firms (Lazzarini, 2015). Leite and Weidmann (2002) argue

that the negative associations among institutions, resource abundance, and economic growth are

insufficient in establishing the direction of causality; it is likely that poor institutions are a result of

resource abundance rather than the cause. Questions about the cause and effect, therefore, remain

unresolved (Frankel, 2010). Rodrik et al. (2004) also argue that a low-quality institution through

which natural resources are channeled to an economic activity aggravates information asymmetries

and adversely affects resource allocation efficiency through politicians’decisions that, though politi-

cally rational, seem economically inefficient. Still, high-quality institutions provide efficient means

for channeling information about market conditions and participants by facilitating mutual coopera-

tion between market actors that eventually reduces transaction costs and increases efficiency. Lastly,

studies “show no evidence of negative indirect effects of natural resources through the institutional

channel”(Brunnschweiler, 2008, p. 399).

Given calls for examination of dynamic effects in natural resources (Sachs, 2007), institutions

(Scott, 2014), and Africa (George, Corbishley, Khayesi, Haas, & Tihanyi, 2016; Zoogah et al.,

2015), we ask: Does institutional endowment, the degree to which a country has effective institu-

tions that facilitate management of economic transactions, moderate the effect of natural resource

abundance on firm performance? To answer the question, we draw on Zoogah et al.’s (2015) institu-

tional dynamics framework, which focuses specifically on Africa. It discusses the interactive pro-

cesses by which institutions and resources influence organizational effectiveness. Organizations play

a central role in economic development (Bloom, Genakos, Sadun, & van Reenen, 2012), and institu-

tions often regulate their behaviors (Peng, 2014; Scott, 1995).

Our study, therefore, contributes to strategic management in four major ways. First, by testing

the dynamic multilevel view of institutions recently suggested as influencing firm performance, we

empirically validate conceptual propositions of natural resource dynamics (Sachs, 2007) and institu-

tional and resource dynamics (Lazzarini, 2015; Musachio, Lazzarini, & Aguilera, 2015; Peng,

2014). Zoogah et al. (2015, p. 12) indicate that “the African context is a configuration or bundle of

exogenous and endogenous stimuli that interactively Influences management of organizations.”

Indeed, some scholars argue that the complexity and uncertainty of the African context leads to

dynamics within and across national and firm levels (Chironga, Leke, Lund, & van Wamelen, 2011;

Collier, 2007; Dia, 1996; Hyden, 2006; Mbaku, 2004). Further, natural resource scholars who focus

on Africa suggest that “there are strong interactions”between economic and political factors that

influence the resultant outcomes of natural resource endowment (Humphreys et al., 2007, p. 14).

Second, the study not only fills a major gap in the literature on management scholarship in the

natural resource environment vis-à-vis firms (Shapiro et al., 2015), but also focuses on Africa, the

major locus of the natural resource curse (see Humphreys et al., 2007). Of the 26 countries consid-

ered to be experiencing the natural resource curse, 75% are in Africa. Third, by examining firm per-

formance, we generate insight that enhances our understanding of organizational effectiveness in

Africa. Most of the firms in this study are multinationals, some of which are involved in exploiting

580 ZOOGAH