Do financial constraints make the environment worse off? Understanding the effects of financial barriers on environmental innovations

Abstract

We analyse the role of financial barriers behind the adoption of environmental innovations with a focus on SMEs by using recent survey data at EU level. Finance is a key lever of innovation, especially relevant in the current phase of the economic cycle, and might play a critical role in defining green economy directions. Empirical analyses confirm financial barriers as a deterrent for the innovative capacity of EU firms. This is true for the economy as a whole, and for manufacturing firms taken alone. Being smaller and having a low amount of human capital in the firm also hampers environmental innovations . On the ‘positive’ side, we note that existing regulations and expected increasing demand for green products both support EI adoption. Financial barriers are perceived by firms and influenced by technological lock-ins, uncertainty in investments, non-competitive markets, and a lack of subsidies. We observe that the ‘deterrent barrier hypothesis’, alternative to the ‘revealed barrier hypothesis’, is not rejected here, as in recent analyses of traditional innovations: perceived financial constraints deter innovative strategies.

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