Institutional settings and financing green innovation

Abstract

The sheer scale of the current environmental challenge underscores the need for successful generation and application of environmentally sustainable innovations. At the same time, there has been growing interest in how national institutional contexts interact with the financial ecosystem, corporate governance, and firm behaviour. Bringing these topics together, we theoretically address and empirically evaluate the institutional and financial conditions under which green innovation and application occur. Using a novel sample of 53 countries over a twenty-one-year period, we show that green innovation is more likely to occur in Liberal Market Economies, a crucial feature of which is the heavier reliance by firms on markets to obtain their finance. However, we also show that this innovation is applied more frequently in economies with a higher degree of State coordination and where high short-term returns are less in demand. Given national institutional contexts are persistent, our results highlight that extensive regulatory intervention is likely required to develop green economies.