A large mineral sector can undermine other companies
A large mineral sector does not necessarily turn a country into a metaphorical goldmine and can even hinder economic growth. A phenomenon known as the "resource curse" can make the finance sector accustomed to serving large, established resource firms at the expense of smaller companies, states a doctoral dissertation being examined at the University of Helsinki.
Many countries rich in natural resources have been found to be slower to develop than other countries – the phenomenon is known as the "resource curse".
"If the finance sector becomes accustomed to serving major, established resource firms, it may not offer services suitable for smaller or young companies. This can slow the growth of the national economy and aggravate the resource curse," says MSSc Sanna Kurronen, a doctoral candidate at the University of Helsinki's Faculty of Social Sciences.
According to the dissertation, countries which are dependent on their natural resources have a smaller banking sector than other countries, and they are more likely to employ market-based financing.
"Such an environment can make it more difficult for small and young companies to acquire financing, as they are typically dependent on domestic banks," Kurronen explains.
Mineral sector companies have longer loan periods
The dissertation indicates that the world's mineral sector firms have less debt and their loan periods are longer than those of other companies. In resource-dependent countries, the same applies to companies in other sectors.
"The presence of a large resource sector seems to regulate the finance structure for companies in other sectors as well," Kurronen states.
This became apparent when Kurronen studied the financial statements of companies from 70 different countries.
Other companies should be given greater attention
When the prices of natural resources collapse, the financing situation of companies in resource-dependent countries becomes more difficult. This is caused both by the weaker growth forecasts for the companies and by the banking sector's weakened ability to provide financing.
It seems that the finance sector is one of the channels through which the resource curse takes effect.
"Potential methods for easing the curse could be better consideration of the finance needs of companies outside the minerals industry and support for the banking sector so that it could mitigate the external price shocks of natural resources instead of accelerating them," says Kurronen.
An example from Finland
One example of how the production structure can shape a country's institutions comes from Finland. During Nokia's heyday, the country increased student places in engineering education, meaning that the needs of the IT sector guided education.
Kurronen points out: "Just like the large IT sector, a large minerals sector can influence a country's education, legislation and finance sector."
MSSc Sanna Kurronen will defend her doctoral dissertation entitled "Natural resources and finance" at the University of Helsinki's Faculty of Social Sciences on 12 May 2017.
The opponent will be Professor Laurent Weill, University of Strasbourg, and the custos, Professor Antti Ripatti.
The dissertation is also available in electronic form through the e-thesis service.
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