Foreign Capital, Natural Resource Rents and Financial Development: A New Approach

Abstract

This article explores the impact of financial development on the ‘natural resources rents–foreign capital accumulation nexus’ in selected natural resource–rich countries during 1970Q1–2016Q4. In doing so, we propose a new approach by applying the autoregressive distributed lag (ARDL) rolling regression technique for our empirical purpose. The results show that financial development has a positive and significant effect on the way natural resource rents affect foreign capital in the case of Australia, Chile, Ecuador, Egypt and Peru in both the short run and the long run. We achieve the same results in the case of Colombia and Iran too, but just in the long run. Also, short-term and long-term negative effects of financial development on the rents–foreign capital nexus are witnessed just in the case of Algeria. We provide some empirical evidence for further robustness of our findings. Finally, we suggest that there is a necessity for the development of the financial system in natural resource–rich countries to reach higher levels of foreign capital, which has a crucial role in their economic growth.