Oil discoveries and innovation

Abstract

This paper explores the effects of giant oil discoveries on innovation for a sample of 179 countries for the period 1975–2005. Evidence indicates that innovation activity slows down after oil discovery. Using a difference-in-differences design, we show that, on average, patent citations decline by 2.4% per year, and the number of actual patents slows down by approximately 2.5% per year. These results are consistent with the notion of the natural resource curse, a phenomenon where resource-rich economies have inferior growth performance relative to resource-poor economies. Cross-sectional analyses indicate that changes in innovation activities are greater in common law countries. We show that governance quality is a possible channel through which a decline in innovative activity occurs after a resource windfall.