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 investigates the effect of targeted economic sanctions, henceforth referred to as “smart- sanctions”
in developing countries by examining whether targeted economic sanctions affect the performance of intra-
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 investigates the effect of targeted economic
sanctions by the United States and the European Union on
the performance of intra- industry non- sanctioned firms.
Using data of non- sanct ioned firms listed on the Zimbabwe
stock exchange during the period 2009– 2018, our regres-
sion results show that non- sanctioned firms in the same
industry as sanctioned firms perform better than ordinary
non- sanctioned firms, signalling the positive competitive
effect. A mediating test suggests that sanctions increase
the market share of non- sanctioned firms in the same in-
dustry as sanctioned firms and subsequently increase their
performance.
KEYWORDS
competitive effect, contagion effect, economic sanctions, firm
performance
644
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SUN etal.
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 Regional Forum on Sustainable Development, which was held in Victoria Falls, the chief of the African
Union (AU), Moussa Faki, reflected SADC sentiments and stressed that the persistence of economic 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 SADC bloc at large. These assertions are consistent with the claim that sanctions are a
modern weapon of mass destruction, which causes great economic mayhem and despair for ordinary citizens
(Habibzadeh, 2 018; Wood, 2008).
In repudiating such claims, the US ambassador to Zimbabwe, Brian Nichols, condemned 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 Zimbabwean government lost 15 billion USD through corruption,” the ambassador further posits that
the persistence of challenges to the Zimbabwean economy is caused by high levels of corruption, 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 targeted autocrats and 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 growth. The existing literature has focused more on the target's performance. In particular, 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 diplomatic news of possible removal of sanctions, and among others. Consequently, 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 wisdom suggests that, apart from crippling operations of the targeted firms, economic sanc-
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 government remains unsolved. To address this issue, we will study whether targeted economic
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 burden its compet itors. As such, we suggest that 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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