The Role of Technological Innovation, Financial Market Risk, and Institutional Quality in Shaping the Impact of Natural Resource Revenues on Financial Development

Rezagholizadeh, Mahdiyeh; Jafari, Hossein; Kafi, Narges

doi:10.22054/ijer.2025.81256.1300

Document Type : Research Paper

Authors

¹ Associate Professor of Financial Economics, Faculty of Economics and Administrative Science, University of Mazandaran, Babolsar, Iran

² Ph.D. Candidate in Financial Economics, Faculty of Economics and Administrative Science, University of Mazandaran, Babolsar, Iran

³ Ph.D. Candidate in Development Economics, Faculty of Economics and Administrative Science, University of Mazandaran, Babolsar, Iran

https://doi.org/10.22054/ijer.2025.81256.1300

Abstract

The resource curse hypothesis, as an important area of research, addresses the complex relationship between natural resource revenues and financial development. The impact of natural resource revenues on the financial development of any country can be influenced by factors such as technological innovation, financial market risk, and institutional quality. It is believed that these factors can influence whether natural resources act as a blessing or a curse. In this line, the present study examined the impact of natural resource revenues on financial development, the development of financial institutions, and the development of financial markets. Applying the fully modified ordinary least squares (FMOLS) model to data from 2000 to 2021, the analysis focused on the role of technological innovation, financial risk, and institutional quality in a selected group of developing countries with rich natural resources. According to the findings, natural resource revenues contribute to the development of financial markets, with technological innovation and institutional quality enhancing this positive effect, while financial market risk diminishes it. The findings showed that although the resource curse hypothesis is supported regarding the impact of natural resource revenues on overall financial development and the development of financial institutions, technological innovation and institutional quality mitigate this negative effect, thereby undermining the resource curse hypothesis. However, financial market risk intensifies the resource curse hypothesis.

Introduction

Natural resources serve as a foundation for a country’s economic growth and development. The countries endowed with natural resources should leverage them to achieve sustainable economic growth. In other words, natural resources are viewed as a driving force for transforming developing and emerging economies into developed ones. Many economists support the idea that economic development significantly depends on resource abundance. However, a growing body of empirical evidence suggests that countries rich in natural resources often experience lower economic growth compared to those without such resources. This paradoxical relationship between resource abundance and slower economic progress was first introduced by Auty (2002) as the resource curse hypothesis. Despite numerous studies on natural resource wealth, a definitive answer has yet to be found regarding whether natural resources are ultimately a blessing or a curse. In the literature on the resource curse, the impact of natural resource revenues on financial development remains particularly complex. Researchers highlight several key factors-such as technological innovation (TIN), financial market risk (FMR), and institutional quality (IQ)-as critical in determining whether natural resources are a blessing or a curse. The present study aimed to examine the impact of natural resource revenues on financial development.

Materials and Methods

This study aimed to examine the impact of natural resource revenues on financial development, with a particular focus on testing the resource curse hypothesis. A fully modified ordinary least squares (FMOLS) model was applied to analyze the data from 2000 to 2021. The analysis focused on a group of resource-rich developing countries, including Iran, Russia, Saudi Arabia, China, Brazil, Argentina, Mexico, Chile, the Democratic Republic of the Congo, the Republic of the Congo, Nigeria, Egypt, India, Indonesia, Malaysia, Qatar, and Vietnam. The modeling approach is based on three key factors—technological innovation, financial market risk, and institutional quality—that may influence the relationship between natural resource revenues and financial development. These variables were incorporated into the model through interaction terms. This allows for an assessment of how each variable shapes the relationship between natural resource revenues and financial development. Based on the proposed theoretical framework and previous research, the general form of the panel data model used in this study is as follows:

(1)

(2)

(3)

Moreover, three financial development indicators were considered as dependent variables across Models (1) to (3). In Model (1), the dependent variable FD represents the overall financial development index; in Model (2), FI denotes the financial institutions development index; and in Model (3), FM stands for the financial markets development index. Other variables were defined as follows: NRR for natural resource revenues, TIN for technological innovation, FMR for financial market risk, IQ for institutional quality, and GDP for gross domestic product.

Results and Discussion

The results of the FMOLS model estimation indicated that natural resource revenues had a negative impact on overall financial development and the development of financial institutions in a selection of resource-rich developing countries, thereby confirming the resource curse hypothesis in these two areas. However, natural resource revenues positively influenced the development of financial markets. Furthermore, the FMOLS estimates for the technological innovation showed a positive relationship with all three indicators: financial development, financial institution development, and financial market development. This suggests that technological innovation can help reduce production costs and increase production efficiency through improved natural resource management. As a result, it enhances the profitability of manufacturing firms and the financial sustainability of businesses, thus facilitating economic and financial development. Regarding financial market risk, the FMOLS model showed a negative relationship with all three dimensions of financial development. This indicates that components of financial market risk-such as external debt, exchange rate volatility, debt service, capital account, and international liquidity-create economic uncertainty, which discourages investment and participation in financial markets. Consequently, this weakens overall financial development, financial institutions, and financial markets. Finally, institutional quality was found to have a positive effect on financial development and financial markets, but a negative effect on the development of financial institutions. This may be explained by the idea that the stronger rule of law is likely to enhance the efficiency of natural resource management within an economy.

Conclusion

In sum, a lack of technological innovation, high financial risk, and weak institutional quality-along with factors such as policy imbalances and low levels of human development-contribute to the occurrence of the resource curse hpothesis in resource-rich countries.

Keywords

Main Subjects

Financial Economics

References

Abaidoo, R. & Agyapong, E.K. (2022). Financial development and institutional quality among emerging economies. Journal of Economics and Development, 24(3), 198-216.‏ https://doi.org/10.1108/JED-08-2021-0135

Acemoglu, D., Johnson, S. & Robinson, J.A. (2001). The colonial origins of comparative development: An empirical investigation. American Economic Review, 91(5), 1369-1401.‏

https://doi.org/ 10.1257/aer.91.5.1369

Aghaei, M., Rezagholizadeh, M. & Jafari, H. (2022). Natural resources and stock market development: role of institutional quality. Macroeconomics Research Letter, 17(35), 155-182. [In Persian].

https://doi.org/10.22080/iejm.2023.25755.1982

Ali, A. & Ramakrishnan, S. (2022a). Financial development and natural resources. Is there a stock market resource curse? Resources Policy, 75, 102457.‏ https://doi.org/10.1016/j.resourpol.2021.102457

Ali, A., Ramakrishnan, S., Faisal, F., Sulimany, H.G.H. & Bazhair, A.H. (2022b). Stock market resource curse: The moderating role of institutional quality. Resources Policy, 78, 102929.‏

https://doi.org/10.1016/j.resourpol.2022.102929

Amin, A., Dogan, E. & Khan, Z. (2020). The impacts of different proxies for financialization on carbon emissions in top-ten emitter countries. Science of The Total Environment, 740, 140127.‏

https://doi.org/10.1016/j.scitotenv.2020.140127

Ano, A., Qamar, M.A.J., Nazir, M.S., Ahmad, I., Timoshin, A. & Shehzad, K. (2023). How investors attitudes shape stock market participation in the presence of financial self-efficacy. Frontiers in Psychology, 11, 553351.‏ https://doi.org/10.3389/fpsyg.2020.553351

Asif, M., Khan, K.B., Anser, M.K., Nassani, A.A., Abro, M.M.Q. & Zaman, K. (2020). Dynamic interaction between financial development and natural resources: Evaluating the ‘Resource curse’hypothesis. Resources Policy, 65, 101566.‏

https://doi.org/10.1016/j.resourpol.2019.101566

Atil, A., Nawaz, K., Lahiani, A. & Roubiaud, D. (2020). Are natural resources a blessing or a curse for financial development in Pakistan? The importance of oil prices, economic growth and economic globalization. Resources Policy, 67, 101683.

‏ https://doi.org/10.1016/j.resourpol.2020.101683

Atkinson, G. & Hamilton, K. (2003). Savings, growth and the resource curse hypothesis. World development, 31(11), 1793-1807.

‏ https://doi.org/10.1016/j.worlddev.2003.05.001

Auty, R. (2002). Sustaining development in mineral economies: the resource curse thesis. Routledge.‏ https://doi.org/10.4324/9780203422595

Badeeb, R.A., Lean, H.H. & Smyth, R. (2016). Oil curse and finance–growth nexus in Malaysia: The role of investment. Energy Economics, 57, 154-165.‏ https://doi.org/10.1016/j.eneco.2016.04.020

Baltagi, B.H. (2013). On the use of panel data methods to estimate rational addiction models. Scottish Journal of Political Economy, 54(1), https://doi.org/10.1007/s00181-021-02071-x

Bato, A., Foglia, M., Shahzad, U. & Fareed, Z. (2022). Green innovation, resource price and carbon emissions during the COVID-19 times: New findings from wavelet local multiple correlation analysis. Technological Forecasting and Social Change, 184, 121957.

http://dx.doi.org/10.1016/j.techfore.2022.121957

Beck, D. (2011). Short-and long-term effects of responsible investment growth on equity returns. The Journal of Risk Finance, 23(1), 1-13.‏

https://doi.org/10.1108/JRF-07-2021-0107

Bhattacharyya, S. & Hodler, R. (2014). Do natural resource revenues hinder financial development? The role of political institutions. World Development, 57, 101-113.

‏ https://doi.org/10.1016/j.worlddev.2013.12.003

Caldara, C. & Iacoviello, M (2018). Financial development and technology. Available at SSRN 681562.

‏ https://dx.doi.org/10.2139/ssrn.681562

Canh, N.P. & Thong, N.T. (2020). Nexus between financialisation and natural resources rents: empirical evidence in a global sample. Resources Policy, 66, 101590.‏ https://doi.org/10.1016/j.resourpol.2020.101590

Chio, A. & Lee, C. (2022). Financial stability and local economic development: the experience of Italian labour market areas. Empirical Economics, 62(4), 1951-1979.‏ https://doi.org/10.1007/s00181-021-02071-x

Davis, G.A. (1995). Learning to love the Dutch disease: Evidence from the mineral economies. World Development, 23(10), 1765-1779.

https://doi.org/10.1016/0305-750X(95)00071-J

Dogan, E., Altinoz, B. & Tzeremes, P. (2020). The analysis of ‘Financial Resource Curse’hypothesis for developed countries: Evidence from asymmetric effects with quantile regression. Resources Policy, 68, 101773.‏ https://doi.org/10.1016/j.resourpol.2020.101773

Dogan, E., Madaleno, M. & Altinoz, B. (2020). Revisiting the nexus of financialization and natural resource abundance in resource-rich countries: New empirical evidence from nine indices of financial development. Resources Policy, 69, 101839.

‏https://doi.org/10.1016/j.resourpol.2020.101839

Duy, L.V.Q. & Cassells, D. (2022). Agglomeration and innovation effort: A longitudinal study on small and medium manufacturing enterprises in Vietnam. Review of Development Economics, 26(3), 1252-1268.‏ https://doi.org/10.1111/rode.12874

Dwumfour, R.A. & Ntow-Gyamfi, M. (2018). Natural resources, financial development and institutional quality in Africa: is there a resource curse? Resources Policy, 59, 411-426.

‏ https://doi.org/10.1016/j.resourpol.2018.08.012

Ebrahim, H., Dubyna, M. & Kholiavko, N. (2022). World experience in the introduction of modern innovation and information technologies in the functioning of financial institutions. Baltic Journal of Economic Studies, 7(2), 188-199.‏ http://dx.doi.org/10.30525/2256-0742/2021-7-2-188-199

Faisal, F., Sulaiman, Y. & Tursoy, T. (2019). Does an asymmetric nexus exist between financial deepening and natural resources for emerging economy? Evidence from multiple break cointegration test. Resources Policy, 64, 101512.‏ https://doi.org/10.1016/j.resourpol.2019.101512

Feng, Y. & Yu, X. (2021). The impact of institutions on financial development: Evidence from East Asian countries. Australian Economic Papers, 60(1), 122-137.‏ https://doi.org/10.1111/1467-8454.12196

Ferrat, Y., Daty, F. & Burlacu, R. (2022). Short-and long-term effects of responsible investment growth on equity returns. The Journal of Risk Finance, 23(1), 1-13.‏ https://doi.org/10.1108/JRF-07-2021-0107

Feyzi Yengjeh, S., Hekmati Farid, S. & Yahyavi Miyavagi, S. (2017). Impact of oil resource rent on good governance indicators of the oil exporting countries. Iranian Journal of Economic Research, 22(71), 189-218. [In Persian]. https://doi.org/10.22054/ijer.2017.8283

Frynas, J.G. & Buur, L. (2020). The presource curse in Africa: Economic and political effects of anticipating natural resource revenues. The Extractive Industries and Society, 7(4), 1257-1270.

‏ https://doi.org/10.1016/j.exis.2020.05.014

Gehring, K., Kaplan, L.C. & Wong, M.H. (2022). China and the World Bank-How contrasting development approaches affect the stability of African states. Journal of Development Economics, 158, 102902.‏

https://doi.org/10.1016/j.jdeveco.2022.102902

Guan, J., Kirikkaleli, D., Bibi, A. & Zhang, W. (2020). Natural resources rents nexus with financial development in the presence of globalization: is the “resource curse” exist or myth? Resources Policy, 66, 101641.‏ https://doi.org/10.1016/j.resourpol.2020.101641

Herb, M. (2005). No representation without taxation? Rents, development, and democracy. Comparative Politics, 3(37), 297-316.

‏https://doi.org/10.2307/20072891

Hu, J., Xu, J., Tong, L. & Razi, U. (2022). The dynamic role of film and drama industry, green innovation towards the sustainable environment in China: fresh insight from NARDL approach. Economic Research-Ekonomska Istraživanja, 35(1), 5292-5309.

‏ https://doi.org/10.1080/1331677X.2022.2026239

Javaheri, B., Ahmadzadeh, K. & Shahveisi, H. (2021). Investigating the effect of natural resources rents and institutional quality on financial development in developing countries. Economics Research, 21(80), 141-168. [In Persian]. https://doi.org/10.22054/joer.2021.53969.881

Khan, M.A., Khan, M.A., Ali, K., Popp, J. & Oláh, J. (2020). Natural resource rent and finance: The moderation role of institutions. Sustainability, 12(9), 3897.‏https://doi.org/10.3390/su12093897

Khodaparast Mashhadi, M., Falahi, M.A. & Rajabzadeh Moghani, N. (2016). A Study on the role of institutional quality in financial development of selected OIC countries. Monetary & Financial Economics, 23(11), 26-45. [In Persian]. https://doi.org/10.22067/pm.v23i11.19433

Leite, M.C. & Weidmann, J. (1999). Does mother nature corrupt? Natural resources, corruption, and economic growth. International Monetary Fund, 19(23), 45-65.

Li, Z., Rizvi, S.K.A., Rubbaniy, G. & Umar, M. (2021). Understanding the dynamics of resource curse in G7 countries: the role of natural resource rents and the three facets of financial development. Resources Policy, 73, 102141. https://doi.org/10.1016/j.resourpol.2021.102141

Maaboudi, R., Nademi, Y. & Dare Nazari, Z. (2022). Resources curse and financialization in Iran's economy. Iranian Energy Economics, 11(42), 127-159. [In Persian]. https://doi.org/10.22054/jiee.2022.68891.1940

Mahdavi Adeli, M.H. & Rohani, M. (2019). The effect of the abundance of natural resources on financial development in selected OPEC countries of oil and gas (with emphasis on the multi-dimensional index of financial market development in the stock market). Financial Knowledge of Securities Analysis, 12(42), 71-83.‏ [In Persian].

https://doi.org/10.22054/joer.2021.53969.881

Majidzadeh, F. & Dahmardeh, N. (2023). Investigating the role of institutional quality in the impact of natural resource rents on Iran's financial development. Economic Growth and Development Research, 13(49),109-124. [In Persian]. https://doi.org/10.30473/egdr.2022.61355.6350

Mehlum, H., Moene, K. & Torvik, R. (2006). Institutions and the resource curse. The Economic Journal, 116(508), 1-20.‏

https://doi.org/RePEc:ecj:econjl:v:116:y:2006:i:508:p:1-20

Meinzen-Dick, R. & Pradhan, R. (2016). Property rights and legal pluralism in post-conflict environments: Problem or opportunity for natural resource management? In Governance, Natural Resources and Post-Conflict Peacebuilding (pp. 525-544). Routledge.

‏http://dx.doi.org/10.4324/9780203109793-25

Narayan, P.K., Sharma, S.S. & Thuraisamy, K.S. (2015). Can governance quality predict stock market returns? New global evidence. Pacific-Basin Finance Journal, 35, 367-380.‏

‏ https://doi.org/10.1016/j.pacfin.2015.02.007

Nawaz, K., Lahiani, A. & Roubaud, D. (2019). Natural resources as blessings and finance-growth nexus: A bootstrap ARDL approach in an emerging economy. Resources Policy, 60, 277-287.‏

https://doi.org/10.1016/j.resourpol.2019.01.007

Noman, A.H.M., Gee, C.S. & Isa, C.R. (2017). Does competition improve financial stability of the banking sector in ASEAN countries? An empirical analysis. PloS one, 12(5), e0176546.

‏https://doi.org/10.1371/journal.pone.0176546

Pan, K., Cheng, C., Kirikkaleli, D. & Genç, S.Y. (2021). Does financial risk and fiscal decentralization curb resources curse hypothesis in China? Analyzing the role of globalization. Resources Policy, 72, 102020.‏ https://doi.org/ 10.1016/j.resourpol.2021.102020

Razaq, R., Xu, J., Tong, L. & Razi, U. (2020). The dynamic role of film and drama industry, green innovation towards the sustainable environment in China: fresh insight from NARDL approach. Economic Research-Ekonomska Istraživanja, 35(1), 5292-5309.‏

https://doi.org/10.1080/1331677X.2022.2026239

Ricardo, D. (1821). From the principles of political economy and taxation. In Readings in the economics of the division of labor: The classical tradition (pp. 127-130).

https://doi.org/ RePEc:wsi:wschap:9789812701275_0014

Robinson, J.A., Torvik, R. & Verdier, T. (2006). Political foundations of the resource curse. Journal of development Economics, 79(2), 447-468.‏ http://dx.doi.org/10.1016/j.jdeveco.2006.01.008

Rudari, S., Shahabadi, A. & Argha, L. (2023). The role of recession and boom in the impact of oil resource rents on financial development index in Iran: Is the institutional quality a matter? Financial Management Strategy, 11(1), 77-100. [In Persian].

http://dx.doi.org/10.22051/JFM.2023.39105.2634

Shahbaz, M., Naeem, M., Ahad, M. & Tahir, I. (2018). Is natural resource abundance a stimulus for financial development in the USA? Resources Policy, 55, 223-232.‏ http://dx.doi.org/10.1016/j.resourpol.2017.12.006

Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations: Volume One. London: printed for W. Strahan; and T. Cadell, 1776..‏ 19(23), 45-60. https://doi.org/10.1108/JRF-07-2021-0107

Tao, R., Umar, M., Naseer, A. & Razi, U. (2021). The dynamic effect of eco-innovation and environmental taxes on carbon neutrality target in emerging seven (E7) economies. Journal of Environmental Management, 299, 113525. https://doi.org/10.1016/j.jenvman.2021.113525

Tehranchian, A. (2021). Is oil curse or a blessing for Iran's financial development?. Quarterly Energy Economics Review, 17(70), 85-116.‏ [In Persian]. http://iiesj.ir/article-1-1293-en.html

Wang, A & Razaq, R. (2022). Financial liberalization, financial sector development and growth: Evidence from Malaysia. Journal of Development Economics, 84(1), 215-233.‏

https://doi.org/10.1016/j.jdeveco.2006.11.006

Wang, J., Umar, M., Afshan, S. & Haouas, I. (2022). Examining the nexus between oil price, COVID-19, uncertainty index, and stock price of electronic sports: fresh insights from the nonlinear approach. Economic Research-Ekonomska Istraživanja, 35(1), 2217-2233.

‏https://doi.org/10.1080/1331677X.2021.1937260

Wang, L., Ahmad, F., Luo, G.L., Umar, M. & Kirikkaleli, D. (2021). Portfolio optimization of financial commodities with energy futures. Annals of Operations Research, 19(23), 1-39.‏ https://doi.org/10.1007%2Fs10479-021-04283-x

Wei, H., Rizvi, S.K.A., Ahmad, F. & Zhang, Y. (2020). Resource cursed or resource blessed? The role of investment and energy prices in G7 countries. Resources Policy, 67, 101663.

‏https://doi.org/10.1016/j.resourpol.2020.101663

Xu, Y. & Zhao, X. (2023). Financial market risk, technology and natural resources nexus: Evidence from China. Resources Policy, 81, 103332.‏ https://doi.org/10.1016/j.resourpol.2023.103332

Yang, O., Jamil, S.A., & Elheddad, M. (2019). The impact of ICT on financial development: Empirical evidence from the Gulf Cooperation Council countries. International Journal of engineering business management, 11, 1847979019870670.

‏https://doi.org/10.1177/1847979019870670

Yu, B., Li, C., Mirza, N. & Umar, M. (2022). Forecasting credit ratings of decarbonized firms: Comparative assessment of machine learning models. Technological Forecasting and Social Change, 174, 121255.‏ https://doi.org/10.1016/j.techfore.2021.121255

Yuxiang, K. & Chen, Z. (2010). Government expenditure and energy intensity in China. Energy Policy, 38(2), 691-694.

‏https://doi.org/RePEc:eee:enepol:v:38:y:2010:i:2:p:691-694

Zaidi, S.A.H., Wei, Z., Gedikli, A., Zafar, M.W., Hou, F. & Iftikhar, Y. (2019). The impact of globalization, natural resources abundance, and human capital on financial development: Evidence from thirty-one OECD countries. Resources Policy, 64, 101476.‏

https://doi.org/10.1016/j.resourpol.2019.101476

Zhang, C. & Liang, Q. (2023). Natural resources and sustainable financial development: Evidence from South Asian economies. Resources Policy, 80, 103282.‏ https://doi.org/10.1016/j.resourpol.2022.103282

Zhang, Q. & Brouwer, R. (2020). Is China affected by the resource curse? A critical review of the Chinese literature. Journal of Policy Modeling, 42(1), 133-152. ‏https://doi.org/10.1016/j.jpolmod.2019.06.005

The Role of Technological Innovation, Financial Market Risk, and Institutional Quality in Shaping the Impact of Natural Resource Revenues on Financial Development

References

References

Volume 30, Issue 102 - Serial Number 102April 2025Pages 166-208

Volume 30, Issue 102 - Serial Number 102
April 2025
Pages 166-208