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

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.