Financing Eco‐Innovation in an Emerging Economy: The Role of Internal Resources, External Support and Government in Turkish SMEs

Abstract

ABSTRACT Empirical studies on firm‐level eco‐innovation (EI) largely focus on developed countries, leaving Emerging Market Economies (EMEs) underexplored despite their pivotal role in sustainable development and their distinct institutional environments. EMEs also face urgency as trading partners adopt environmental regulations, such as the European Green Deal and the Carbon Border Adjustment Mechanism. To address this gap, this study investigates EI adoption in Turkish Small and Medium‐sized Enterprises (SMEs), a representative case of EMEs. The research builds on a Schumpeterian view of innovation, emphasizing appropriation risks, the ‘double externality,’ and the ‘triple helix’ problem. We use a recently released, unexplored dataset to address two questions: (1) Do Turkish SMEs rely more on internal resources (financial and technical) or on external support to adopt EI? (2) When external support is limited, do governmental grants or subsidies effectively stimulate EI? Our results show that Turkish SMEs predominantly depend on self‐financing and in‐house expertise, while governmental grants and subsidies are statistically insignificant. Institutional factors—such as inter‐sectoral cooperation, financial advice, and regulatory clarity—emerge as significant determinants. Moreover, younger firms are more likely to adopt EI, while older firms risk being locked into established routines. These findings highlight structural climate financing gaps and the danger of subsidy misallocation (“zombification”) in EMEs. Policy implications extend beyond Türkiye: effective promotion of EI in EMEs requires climate‐targeted subsidy design, improved access to finance, and less punitive insolvency regimes. Embedding these measures in stronger institutional settings enables SMEs to view EI as a strategic investment rather than a short‐term cost.

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