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Do African resource rents promote rent-seeking at the expense of entrepreneurship?

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Abstract

This paper examines the relationship between natural resource rents and new business formation (a critical measure of entrepreneurship) using a panel dataset of 28 African countries covering the period 2002–2014. The paper finds robust evidence that nations with high resource rents (i.e., resource rents exceeding 30% of GDP) significantly exhibit less entrepreneurial activity. This result is consistent with the hypothesis that high resource rents significantly promote rent-seeking behavior at the expense of entrepreneurship. Policies that reward productive entrepreneurship and reduce incentives for rent-seeking behavior are therefore important for reversing this negative relationship in African countries with high natural resource-derived income.

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Notes

  1. Survey-based responses from the Global Entrepreneurship Monitor (GEM) provide data on respondents having the intention of starting a business, being in the process of starting a new business, or being engaged in early-stage entrepreneurial activity. However, GEM data does not measure formal and informal entrepreneurship separately and it can also easily overstate the rate of entrepreneurship if some individuals who claim to be in the process of starting a business ultimately fail to do so.

  2. It should be noted that natural resources could also be a curse in other ways related to resource scarcity (see for example Collier and Laroche (2015)) and geographical disadvantage due to inadequate rainfall, poor soil, tropical diseases, etc. While acknowledging that these factors are important, the resource rents measure is used as this paper is more focused on the rent-seeking channel associated with resource rents.

  3. To verify that this is an appropriate and informationally efficient way to aggregate these underlying measures, principle component analysis (PCA) was performed to determine the variance maximizing linear combination of the governance measures. The resulting weights are very similar to the uniform weights from the simple average. Indeed, when the overall institutional quality is calculated both ways (i.e., the simple average and the weighted average according to the PCA weights), the correlation coefficient between the two series is 0.99. Therefore, overall governance/institutions are measured by way of the simple average of the underlying six governance measures.

  4. The Hausman test was performed for the main specification in column (1) and the null hypothesis that a random-effects specification is appropriate is rejected at the 5% significance level (Chi2 = 15.21, p-value = 0.0187).

  5. We would expect the adverse effect of natural resource dependence on entrepreneurship to be more pronounced for point-source resources such as oil, diamonds, and minerals, which are found in dense concentrations and generate large rents that are easily appropriable, than for resources such as agricultural commodities, whose rents are more dispersed within different regions of a country. However, when more disaggregated data on resource rents are used, the sample size is reduced significantly. For example, estimating a separate regression using oil rents only results in a sample size of 10 countries and 86 observations in total. Although the results are consistent with those obtained using the aggregate measure of resource rents, they are no longer significant due to loss of statistical power.

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  1. Salisbury University, Salisbury, MD, USA

    Jonathan Munemo

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Munemo, J. Do African resource rents promote rent-seeking at the expense of entrepreneurship?. Small Bus Econ 58, 1647–1660 (2022). https://doi.org/10.1007/s11187-021-00461-0

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