Climate finance spillovers and entrepreneurship in developing countries

Abstract

AbstractResearch SummaryWe conduct a multicountry analysis and show that there is a strong and significant positive relationship between climate finance and entrepreneurship, even after controlling for conventional macroeconomic and institutional factors commonly reported in the literature. Specifically, a 10% increase in climate finance is linked with a 2% increase in entrepreneurial activity across most countries. There are important heterogeneities in this nexus as it relates to fossil fuel exporting countries—the main “losers” from a global move away from fossil fuels. We find that although fossil fuel exporting countries exhibit notably faster rates of entrepreneurship growth, the interaction with climate finance in these countries is negatively related to entrepreneurial activity. This finding holds across different types of climate finance—adaptation and mitigation—highlighting its robustness.Managerial SummaryIt is often suggested that more finance will lead to more entrepreneurship. We conduct a multicountry analysis and add nuance to this notion. We find that although there is a strong and significant positive relationship between climate finance and entrepreneurship in most countries, this is not always true for fossil fuel exporting countries. Fossil fuel exporting countries, despite experiencing faster entrepreneurial growth, exhibit a negative interaction between climate finance and entrepreneurship. For managerial practice, these results emphasize the importance of targeted strategies in deploying climate finance. Policymakers and investors should consider nuanced approaches that address the specific economic dependencies and regulatory environments of fossil fuel exporting countries.