From uncertainty to opportunity: financial development as bridge to green innovation under economic policy uncertainty
Abstract
Green innovation (GI) is increasingly recognized as an essential strategy for tackling urgent environmental issues, such as climate change, resource depletion, and pollution. While research is expanding on how economic policy uncertainty (EPU) affects GI, the influence of financial sector development (FSD) as a moderator in this context remains under-examined. To address this gap, we conduct an empirical analysis utilizing two decades of data (2000–2019) from five major emerging economies (BRICS). The study employs FMOLS and DOLS models to scrutinize the data. The findings indicate that EPU has a considerable adverse effect on GI, suggesting that uncertainty in economic policies can obstruct environmentally sustainable progress. In contrast, FSD demonstrates a notable positive association with green innovation, indicating that a robust financial sector can support and bolster these initiatives. Furthermore, the study identifies that FSD serves a crucial intermediary function in the EPU-GI connection. The policy implications of this study are significant, indicating that decision-makers should prioritize enhancing financial sector institutions to foster GI, particularly in times of heightened economic volatility. By providing new evidence regarding the dynamics between EPU, FSD, and GI, this investigation offers valuable insights for developing policies that harmonize economic stability with environmental sustainability.
First published online 1 April 2025
Keyword : BRICS, economic policy uncertainty, financial sector development, green innovation
How to Cite
Han, H., Farooq, U., Alam, M. M., Tabash, M. I., Khudoykulov, K., & Chen, J. (2025). From uncertainty to opportunity: financial development as bridge to green innovation under economic policy uncertainty . Technological and Economic Development of Economy, 1-23. https://doi.org/10.3846/tede.2025.23268
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Cao, X., & Zhang, Y. (2023). Environmental regulation, foreign investment, and green innovation: A case study from China. Environmental Science and Pollution Research, 30(3), 7218–7235. https://doi.org/10.1007/s11356-022-22722-5
Chen, Q., & Low, M. (2021). Investigating green investment payoff in China. Pacific Accounting Review, 34(1), 70–104. https://doi.org/10.1108/PAR-07-2020-0091
Chen, R., Ramzan, M., Hafeez, M., & Ullah, S. (2023). Green innovation-green growth nexus in BRICS: Does financial globalization matter? Journal of Innovation & Knowledge, 8(1), Article 100286. https://doi.org/10.1016/j.jik.2022.100286
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Feng, Y., & Wu, H. (2022). How does industrial structure transformation affect carbon emissions in China: The moderating effect of financial development. Environmental Science and Pollution Research, 29, 13466–13477. https://doi.org/10.1007/s11356-021-16689-y
Gu, X., Cheng, X., Zhu, Z., & Deng, X. (2021). Economic policy uncertainty and China’s growth-at-risk. Economic Analysis and Policy, 70, 452–467. https://doi.org/10.1016/j.eap.2021.03.006
Guo, J., Zhou, Y., Ali, S., Shahzad, U., & Cui, L. (2021). Exploring the role of green innovation and investment in energy for environmental quality: An empirical appraisal from provincial data of China. Journal of Environmental Management, 29, Article 112779. https://doi.org/10.1016/j.jenvman.2021.112779
Habiba, U., & Xinbang, C. (2022). The impact of financial development on CO2 emissions: New evidence from developed and emerging countries. Environmental Science and Pollution Research, 29, 31453–31466. https://doi.org/10.1007/s11356-022-18533-3
Hasan, M. M., & Du, F. (2023). Nexus between green financial development, green technological innovation and environmental regulation in China. Renewable Energy, 204, 218–228. https://doi.org/10.1016/j.renene.2022.12.095
Hnainia, H., & Mensi, S. (2024). The role of institutional factors in shaping the relationship between economic policy uncertainty and energy consumption in Gulf countries: An empirical analysis. Journal of Financial Economic Policy, 17(2), 246–269. https://doi.org/10.1108/JFEP-02-2024-0049
Hsu, C.-C., Quang-Thanh, N., Chien, F. S., Li, L., & Mohsin, M. (2021). Evaluating green innovation and performance of financial development: Mediating concerns of environmental regulation. Environmental Science and Pollution Research, 28, 57386–57397. https://doi.org/10.1007/s11356-021-14499-w
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Ibrahim, R. L., Ozturk, I., Al-Faryan, M. A. S., & Al-Mulali, U. (2022). Exploring the nexuses of disintegrated energy consumption, structural change, and financial development on environmental sustainability in BRICS: Modulating roles of green innovations and regulatory quality. Sustainable Energy Technologies and Assessments, 53, Article 102529. https://doi.org/10.1016/j.seta.2022.102529
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Jiakui, C., Abbas, J., Najam, H., Liu, J., & Abbas, J. (2023). Green technological innovation, green finance, and financial development and their role in green total factor productivity: Empirical insights from China. Journal of Cleaner Production, 382, Article 135131. https://doi.org/10.1016/j.jclepro.2022.135131
Jiang, Y., Zhou, Z., & Liu, C. (2019). Does economic policy uncertainty matter for carbon emission? Evidence from US sector level data. Environmental Science and Pollution Research, 26, 24380–24394. https://doi.org/10.1007/s11356-019-05627-8
Jory, S. R., Khieu, H. D., Ngo, T. N., & Phan, H. V. (2020). The influence of economic policy uncertainty on corporate trade credit and firm value. Journal of Corporate Finance, 64, Article 101671. https://doi.org/10.1016/j.jcorpfin.2020.101671
Kao, C. (1999). Spurious regression and residual-based tests for cointegration in panel data. Journal of Econometrics, 90(1), 1–44. https://doi.org/10.1016/S0304-4076(98)00023-2
Khan, M., & Ozturk, I. (2021). Examining the direct and indirect effects of financial development on CO2 emissions for 88 developing countries. Journal of Environmental Management, 293, Article 112812. https://doi.org/10.1016/j.jenvman.2021.112812
Li, X., Hu, Z., & Zhang, Q. (2021). Environmental regulation, economic policy uncertainty, and green technology innovation. Clean Technologies and Environmental Policy, 23(10), 2975–2988. https://doi.org/10.1007/s10098-021-02219-4
Li, H., Ali, M. S., Ayub, B., & Ullah, I. (2024). Analysing the impact of geopolitical risk and economic policy uncertainty on the environmental sustainability: Evidence from BRICS countries. Environmental Science and Pollution Research, 31, 46148–46162. https://doi.org/10.1007/s11356-023-26553-w
Luo, X., Yu, M., & Jin, Y. (2023). The impact of economic policy uncertainty on enterprise green innovation: A study on the moderating effect of carbon information disclosure. Sustainability, 15(6), Article 4915. https://doi.org/10.3390/su15064915
Ngo, T., Trinh, H. H., Haouas, I., & Ullah, S. (2022). Examining the bidirectional nexus between financial development and green growth: International evidence through the roles of human capital and education expenditure. Resources Policy, 79, Article 102964. https://doi.org/10.1016/j.resourpol.2022.102964
Nguyen, Q., & Kim, H. T. (2023). An exploration on policy uncertainty as a driver of R&D activity. Research in International Business and Finance, 64, Article 101883. https://doi.org/10.1016/j.ribaf.2023.101883
Nibedita, B., & Irfan, M. (2023). The dynamic nexus among energy diversification and carbon emissions in the E7 economies: Investigating the moderating role of financial development. Emerging Markets Finance and Trade, 59(14), 3968–3981. https://doi.org/10.1080/1540496X.2022.2161817
Organization for Economic Co-operation and Development. (n.d.) OECD Data. Retrieved April 2, 2024, from https://www.oecd.org/en/data.html
Pesaran, M. H. (2004). General diagnostic tests for cross section dependence in panels. SSRN. https://doi.org/10.2139/ssrn.572504
Pesaran, H. M. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22(2), 265–312. https://doi.org/10.1002/jae.951
Phillips, P. C., & Hansen, B. E. (1990). Statistical inference in instrumental variable regression with I(1) processes. The Review of Economic Studies, 57(1), 99–125. https://doi.org/10.2307/2297545
Raihan, A. (2023). The dynamic nexus between economic growth, renewable energy use, urbanization, industrialization, tourism, agricultural productivity, forest area, and carbon dioxide emissions in the Philippines. Energy Nexus, 9, Article 100180. https://doi.org/10.1016/j.nexus.2023.100180
Ramzan, M., Abbasi, K. R., Salman, A., Dagar, V., Alvarado, R., & Kagzi, M. (2023). Towards the dream of go green: An empirical importance of green innovation and financial depth for environmental neutrality in world’s top 10 greenest economies. Technological Forecasting and Social Change, 189, Article 122370. https://doi.org/10.1016/j.techfore.2023.122370
Ren, X., Liu, Z., Jin, C., & Lin, R. (2023). Oil price uncertainty and enterprise total factor productivity: Evidence from China. International Review of Economics & Finance, 83, 201–218. https://doi.org/10.1016/j.iref.2022.08.024
Sohail, M. T., Ullah, S., & Majeed, M. T. (2022). Effect of policy uncertainty on green growth in high-polluting economies. Journal of Cleaner Production, 380, Article 135043. https://doi.org/10.1016/j.jclepro.2022.135043
Stock, J. H., & Watson, M. W. (1993). A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica, 61(4), 783–820. https://doi.org/10.2307/2951763
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