Institutional Quality and Financial Development as Keys to Green Tech Innovation: New Global Evidence

Abstract

This study examines the impact of institutional quality and financial development on green-technology innovation across 57 countries from 2000 to 2021. Using robust econometric models, the results indicate that enhancing institutional quality generally supports green investment, while appropriately regulated financial development contributes only when supervisory capacity and macroeconomic conditions are adequate. However, these effects are not uniform across countries and depend strongly on their level of development. In low-income economies, neither institutional quality nor financial depth exerts a statistically discernible influence on innovation, suggesting that more basic capabilities remain the binding constraint. Upper-middle-income nations display mixed outcomes: institutional reforms can be helpful, yet deeper financial systems tend to dampen green innovation unless accompanied by sufficient economic growth; by contrast, in high-income countries financial depth regains a modest positive role, whereas only rule-of-law component of institutional quality continue to spur innovation. Furthermore, the study uncovers a nonlinear relationship, revealing that the influence of institutional quality and financial development on green technology innovation changes once an economic growth threshold relevant mainly to upper-middle-income economies is reached. These findings underscore the importance of tailoring policy strategies to a country's development stage to maximize the effectiveness of institutional and financial reforms.