Enhancing natural resource rents through industrialization, technological innovation, and foreign capital in the OECD countries: Does financial development matter?

Abstract

The value of natural resource exploitation increased because of economic advancement, which drives industrialization. When natural resources are overexploited through farming, mining, or deforestation, it can negatively impact the environment and have financial repercussions for the nation in the long run. Therefore, this study examined the impact of technological innovation, industrialization, foreign direct investment (FDI), and financial development on natural resource extraction. This study utilized the augmented mean group (AMG), common correlated effect mean group (CCEMG), and Dumitrescu and Hurlin causality methods to analyze a panel of OECD countries from 1990 to 2021. The paper discovered that innovation significantly decreases natural resource extraction while financial development expands it. However, when controlling for interactive relationships among the variables, this study discovered that innovation independently increases resource extraction. The study also discovered through our causality tests that resource extraction has bidirectional relationships with all its determinants, except for FDI, where it exhibits a unidirectional relationship. Our findings have significant implications for the environment. Extractive activities, though necessary for industrialization, hamper the environment. Yet, the expectation that innovation and foreign capital might introduce efficiency in resource extraction or even reduce reliance on resource wealth in financially developed economies garners no clear empirical support.