Financial misallocation and green innovation efficiency: China's firm-level evidence

Abstract

The prevalent financial misallocation phenomenon appears to restrict firms' ability be to improve green innovation efficiency. Our theoretical model yields a testable hypothesis, which the empirical analysis validates. We consider the economic implications, channels, and countermeasures that emerge from impacts promoted by financial misallocation on green innovation efficiency. We use a firm-level dataset from 2008 to 2021. Our findings suggest that financial misallocation hinders Chinese firms' green innovation efficiency. We show that in which supply chain concentration is the most important channel for the negative influence promoted by financial misallocation. We also find that firms face discrimination in having access to financial resources based on type of ownership and size. Our results should enable policy makers to clearly see the green-innovation gains that can be produced in China by eliminating financial misallocation.