Institutional quality, financial development, and economic growth: drivers of environmental innovation across emerging and advanced markets

Abstract

This study examines how governance and financial development shape environmental innovation across a panel of 18 countries (9 advanced and 9 emerging markets) over 1990–2020. Environmental innovation is proxied by OECD fractional patent counts for environment-related technologies, environmental management technologies, climate change mitigation, and climate change adaptation. Governance is measured using the regulatory quality indicator from the Worldwide Governance Indicators. We estimate dynamic panel models using both Difference GMM and System GMM, including year dummies and collapsed instruments. Overall, the results reveal pronounced heterogeneity across technology types and market contexts. Higher regulatory quality is associated with higher environmental innovation, most consistently for environment-related, environmental management, and mitigation technologies, particularly in emerging countries, while the relationship with adaptation technologies is weaker and less robust across country groups. Financial institutions and financial markets display heterogeneous effects between emerging and advanced economies. Results are broadly consistent when splitting the sample into pre- and post-Paris Agreement periods