Environmental Tax, SME Financing Constraint, and Innovation: Evidence From OECD Countries

Abstract

This paper examines the impact of environmental tax on SME innovation and how SME financing constraint moderates this relationship. Given the paucity of research on the implications of financing constraints on SMEs' green innovative activities, the study adopts cross-country panel data to investigate the impact of environmental tax on SME's innovative activities across 24 OECD countries for the period 2000-2019. Results from our study indicate that an increase in environmental tax leads to a decrease in SME innovation. Further, we also find that financing constraint positively moderates the relationship between environmental tax and SME innovation. Our findings shed new light on the theoretical and practical implications of financing constraints on SMEs' green innovative activities. Managerial Relevance StatementThis paper aims to create awareness amongst managers of the implication of environmental tax on SMEs financing constraints, thereby requiring managerial decisions and strategies to avoid attracting environmental taxes to help them innovate. Thus, the results of this papers will assist SMEs managers in responding to the impact of environmental taxes by pursuing policies that mitigate the impact of environmental taxes. Besides, evidence of how SMEs' financing constraint moderates the relationship between environmental tax and SMEs' innovation has been provided in this paper to guide managers.

Editorial Entrepreneurial Finance for Green Innovative SMEs

“…Finally, even where green SME innovation policies exist, multiple issues in terms of extra financial support, investment selection, funding availability, and market conditions will affect their outcomes, as reflected in this special issue call and its introductory IEEE paper [30] and the resulting papers presented in this special issue (see [4], [9], [32], [34], [35], [36], [45]). These papers offer important contemporary insights into what we know and what we need to know in order to improve the availability of green innovation financing that can transform the current global economy into a desirable future sustainable environment and society.…”

“…Tingbani et al [45] point to the lack of studies that examine the relationship between environmental policies and innovation and the contention that tax instruments are an efficient means of encouraging cleantech emission reduction and adoption [2]. They, therefore, set out to examine the impacts of an environmental tax on SME innovation and the relationship on SME finance constraints.…”

“…The focus has been on OECD (European and North American) more advanced economies. Whilst these papers offer examples of the more mature government SME green finance policies and their lessons and implications, it should be acknowledged, as stated by Tingbani et al, [45], that the potential transferability of policies between different countries in terms of their degree of economic maturity, governance, and cultures is unknown, and more research is required. A further common theme is that, even within the mature country economies studied, SME green finance data remains patchy and limited.…”

“…Critically, these papers consistently point to the finance gaps for green innovation SMEs which are disrupting the flow of the innovation finance escalator [9]. This disruption is occurring across the mature SME finance markets of Europe and North America [45] and preventing the more rapid commercialization of potential game-changing low-carbon and nature positive solutions for our environmental sustainability [32], [34], [36].…”

“…Finally, alongside the long-horizon investment required for green tech, Tingbani et al [45], echoing Owen et al [31], point to the need for a holistic mix of SME green finance programs and instruments (e.g., tax and financial inducements) that are supported by coherent and cohesive policy mix ( [47], Owen, 2020), which offers business support (e.g., investment readiness: [9]) and a suitably strong environmental regulatory regime. Since innovation technology financing is a long game [25], this approach also requires a stable government that can encourage the substantial long-horizon private financing required.…”