Natural resource endowment and firm-level innovation in Africa: Evidence from cross-country analysis

Abstract

This paper investigates the impact of a country’s natural resource endowment on the innovation propensity of firms in Africa. It was expected that firms in resource-rich countries have less incentive to innovate than firms in resource-poor countries due to the destructive effects of large resource rents on supportive institutions and political order. The data used for the empirical analysis were obtained from the World Bank’s enterprise surveys global development indicators and the African Economic Outlook reports. The hierarchical nature of the analysis called for a multilevel mixed effect modelling strategy. Results suggest that firms in resource-rich countries are not necessarily less innovative than firms in resource-poor countries. High natural resource endowment appeared to reduce firm-level innovation only if associated with poor institutional and technological capabilities. The innovativeness of firms in resource-rich sub-Saharan Africa countries was found to be lower than that of firms in North African countries. The negative effect of poor institutional quality appeared to be dampened among firms with better innovation capabilities. The findings imply that building effective institutional environments and enhancing firm-level innovative efforts would help mitigate the ‘resource curse’ which, in turn, is dictated by the resulting types of political settlements in resource-rich African countries.

Keywords:

• firms
• innovation
• Africa
• country
• natural resource
• institution

Notes

1 Throughout this paper, resource refers to the stock of minerals and fuel (also called hard commodities) a country is endowed with.

2 Throughout this paper, firms in the non-resource sectors or just firms are referred to as enterprises engaged in manufacturing and service activities only.

3 Innovative efforts or capabilities are represented by R&D spending of firms as this helps identify, acquire and adapt new technologies (Lall 2003).

4 Composite measures of institution and innovation were taken from WEF (2017) with the scores ranging from 1 to 7 with the high values representing better performances.