How does innovation take place in the mining industry? Understanding the logic behind innovation in a changing context

Mining activity has been contributing to the income of resource-rich developing countries but it has also been considered as a "curse" for economic development. Reviews of a literature from innovation perspective reveal that the sector has the following mutually-influencing constraints on innovation: a) the commodity price is volatile and exogenously-determined, leaving no scope for differentiation; b) mining firms have low incentive for investing in knowledge (e.g. research and development (R & D)) due to low appropriability; c) development of mines require large, upfront, and long-term investments, leaving no room to take additional risks; d) mining firms tend to operate in an enclave, with limited backward and forward linkages; and e) comparative advantage is largely determined by the presence of mineral deposit not by productive capability. This study aims to bring together evidence to understand the innovation mechanisms in the mining sector. We uncovered that innovation and linkages in mining sector are closely related to commodity prices as follows: a) mineral exploration, a risky, knowledge-intensive investment to increase mineral supply that leads to profit, is equivalent to R&D; b) mining firms increase the exploration and R&D investments when the mineral prices rise; c) mining firms rely on innovation by the suppliers to reduce production cost; and d) mining firms increase the use of suppliers when mineral prices fall. The better understanding of innovation mechanism in mining sector enables to formulate effective policies to make the sector to be a catalyst in transforming the economy of resource rich developing countries.

JEL Classification: L72 O25

Keywords: the resource curse, mining, innovation, economic development, extractive industry