Externalities of economic sanctions on performance of intra‐industry non‐sanctioned firms: Evidence from Zimbabwe
| Published date | 01 November 2021 |
| Author | Jie Sun,Lewis Makosa,Jinkun Yang,Fangyuan Yin,Moses Jachi,Wellington Garikai Bonga |
| Date | 01 November 2021 |
| DOI | http://doi.org/10.1111/sjpe.12290 |
Scott J Polit Econ . 2021;68:643–664. wileyonlinelibrary.com/journal/sjpe
|
643
© 2021 Scottish Ec onomic Society
1 | INTRODUCTION
This paper inves tigates the ef fect of targete d economic sanc tions, hencef orth referr ed to as “smart- sanctions”
in developing coun tries by examini ng whether tar geted economic s anctions af fect the per formance of intr a-
industry n on- sanctioned firms (IINS ) in the context of Zimbabwe. As exp lained in past literature (see , e.g. Wang
et al., 2019), there are dif ferent types of econ omic sanctions, r anging from unilater al sanctions (sanc tions imposed
by a single countr y) to plurilateral sanctio ns (sanctions imposed by a gro up of countries, such as a regiona l bloc).
Zimbabwe has bee n under both unilateral and plur ilateral sanctions, that i s from the United States (US) and the
European Union (EU).
Accepted: 25 May 20 21
DOI: 10 .1111/sjpe.1 2290
ORIGINAL ARTICLE
Externalities of economic sanctions on
performance of intra- industry non- sanctioned
firms: Evidence from Zimbabwe
Jie Sun1 | Lewis Makosa1 | Jinkun Yang1 | Fangyuan Yin1 |
Moses Jachi2 | Wellington Garikai Bonga3
1School of Accou nting, Tianjin Uni versity of
Finance and Economics, Tianjin, China
2School of Accounting, Midlands State
University, Gweru, Zimbabwe
3School of Accou nting, Great Zimb abwe
University, Masvingo, Zimbabwe
Correspondence
Lewis Makosa, S chool of Accounting , Tianjin
Universit y of Finance and Econom ics,
Zhujiang Road 2 5th, Hexi distric t, Tianjin,
China.
Email: leemakosa@yahoo.com
Funding information
National Natu ral Science Found ation of
China, Grant/Award Number: 71771162
Abstract
This paper investig ates the effect of t argeted economic
sanctions by the Un ited States and the Europ ean Union on
the performa nce of intra- industr y non- sanction ed firms.
Using data of non- sanct ioned firms listed on the Zimbabwe
stock exchange during t he period 2009– 2018, our regres-
sion results show that n on- san ctioned firms in t he same
industry as s anctioned fir ms perform bet ter than ordinar y
non- sanctioned firms, signalling the positive competitive
effect. A med iating test sugges ts that sanct ions increase
the market share of non- sanctioned fir ms in the same in-
dustry as san ctioned firms a nd subsequently in crease their
performance.
KEYWORDS
competitive effect, contagion effect, economic sanctions, firm
performance
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SUN et al.
A recent brother ly posture adopted by a g roup of 16 African nations w ho are members of the S outhern African
Development Co mmunity (SADC) has resu lted in a vigorous, growing c ampaign and a collecti ve voice on a call for
immediate remova l of US and EU economic sanctions im posed on Zimbabwe. In the same vei n, during the sixth
African Region al Forum on Sust ainable Develo pment, which w as held in Victo ria Falls, the chief of t he African
Union (AU), Mouss a Faki, reflecte d SADC sentiment s and stress ed that the pers istence of econom ic sanctions
is not only causin g terrible anguish to ordinar y Zimbabwean citizens, but is also im peding the economic growth
of Zimbabwe and the S ADC bloc at large . These asser tions are consist ent with the claim t hat sanction s are a
modern weapo n of mass destruc tion, which c auses great eco nomic mayhem and d espair for ordin ary citizens
(Habibzadeh, 2 018; Wood, 2008).
In repudiating su ch claims, the US a mbassador to Zi mbabwe, Brian Nic hols, condemn ed the SADC and AU
assertions a s pernicious lies on the basis tha t there are no comprehensive san ctions imposed on Zimbabwe a s a
whole countr y. Instead, the United States imp osed specific economic sa nctions on a few individual s and compa-
nies, under th e Zimbabwe Democracy an d Economic Recovery Act (20 01), which is subject to annual ren ewal. In
tandem with t he announcement made by t he former Head of State of Zimb abwe, the late President R .G. Mugabe,
that “the Zimb abwean government l ost 15 billion USD t hrough corrupt ion,” the ambassa dor furthe r posits that
the persiste nce of challenges to t he Zimbabwean eco nomy is caused by hi gh levels of corrupt ion, rent- seeking,
economic misma nagement, economic op portunism and selec tive application of law wh ich has aggravated political
risk. This argument i s consistent with prior l iterature (e.g. Muelle r & Mueller, 1999; Oechslin, 2014) which sug gests
that the target ed autocrats a nd elites may delib erately plunge the economy into cha os so as to validate a point
that economic s anctions are brutal to or dinary citizens. Even then, n on- sanctioned fir ms still trade with both th e
United States an d the EU, to the extent of receivin g grants and donations.
While both narr atives are plausible , to date, little empir ical evidence exist s to substantiate a vie w that targeted
economic sanctions stifle the operations of non- sanctioned firms, consequently impeding their performance and
economic grow th. The existi ng literature has f ocused more on t he target's pe rformance. I n particula r, Ahn and
Ludema (2020) presented a performance model of a sanctioned firm when government incentives shield the tar-
get from the full br unt of sanctions, and Drac a et al. (2018) focused on the respons e of target companies' stock
returns to the dip lomatic news of pos sible removal of sa nctions, an d among others . Consequentl y, we provide
additional evi dence to the existing literatu re by examining whether targe ted economic sanctions af fect the per-
formance of non- sanctioned firms in th e same industry as ta rgeted firms.
Conventional wis dom suggest s that, apar t from crippling o perations of th e targeted fir ms, economic sa nc-
tions deter the gr owth of non- sanctioned firm s. In fact, studies based o n theoretical analysis (e.g. G rebe, 2010;
Mararike, 2018) sug gest that the United State s and the EU economic sanc tions imposed on sel ected Zimbabwean
firms are hur ting Zimbabwean citizens exclusi vely. While their literature is intere sting, its main deficienc y is the
lack of analysis fr om the pragmatic and measu red phenomena of real exp erience to validate the pres ence of con-
tagion effec ts from targeted e conomic sanctio ns. Therefore, the cont ention between tho se that impose sanc tions
and the target gove rnment remains u nsolved. To address th is issue, we will stu dy whether ta rgeted economi c
sanctions af fect the perform ance of IINS.
We suggest that the c onsequences of economi c sanctions for IINS ca n come through either cont agion effects
or competitive ef fects. Intuitively, the pol icies and economic activit ies that determine the perf ormance of firms
in the same indu stry are almost equiv alent (Luo & Nagarajan, 2015). T he literature on industr y contagion effect s
(Ferris et al., 1997; Warner, 1977) sugges ts that the announce ment of negative informat ion about a firm advers ely
affects t he performance of oth er firms in the same ind ustry because it e xposes risks affe cting the whole indu stry.
Conversely, anothe r branch of literature (Aharony & Sw ary, 1983; A ltman, 1984; Haensly et al., 2001) sug gests
the presence of co mpetitive effects. T his states that, if the bad ne ws is due to events specific to th e failing firm,
then that firm b ears the costs and does not bur den its compet itors. As such, we suggest tha t the imposition of
economic sanc tions may affect compe titors' performance ne gatively through contag ion effects or positi vely as a
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