Accelerating innovation in industrialized countries: how relevant is the interaction between financial development and environmental factors?

The impact of countries' levels of financial sector development in influencing innovation and environmental quality cannot be overemphasized. However, studies on the tripartite relationships among financial sector development-innovation-environmental quality have produced mixed results, necessitating further research. This study, therefore, aims to investigate the impact of financial sector development on innovation and examine how financial sector development moderates the impact of environmental factors in influencing innovation. Relying on panel data spanning 1991-2014 for 27 selected industrialized countries, findings from the system generalized method of moment (GMM) suggest that higher financial development robustly increases innovation. Further evidence also shows that while higher energy consumption, renewable energy, and carbon dioxide emissions spur innovation, increases in ecological footprint lower innovations. However, a well-developed financial sector dampens the negative impact of ecological footprint on innovation while propelling the innovation-enhancing effect of carbon dioxide emissions and energy consumption with no apparent impact on renewable energy. A key implication of the findings is that financial development has a far more significant effect on innovation in countries with high environmental degradation and energy consumption. In addition to examining to the effect of financial sector development on innovation, this study examines how financial sector development mediate the impact of environmental factors in influencing innovation in industrialized countries. We find that higher financial development and ecological footprint individually promote increases and decreases innovation respectively. However, a well-developed financial sector reduces the negative effect of ecological footprint on innovation. This study is significant and makes a case for countries to develop their financial sectors as a way of curbing environmental pollution.