Climate finance and innovation with natural resource dependence thresholds

The existing literature on the resource curse primarily focuses on macroeconomic impacts. This study extends this research by examining the firm-level effects of resource extraction on innovation and how climate finance can mitigate these negative impacts. Using firm level data from 100 countries, we show that climate finance and innovation are positively linked, with increases in climate finance significantly boosting the likelihood of both product and process innovations. Specifically, our results show that a one billion US dollar increase in climate finance is associated with a 5%-34% rise in the probability of firm-level innovation, depending on the specific measure of innovation used. We also find that this positive relationship is subject to a threshold in natural resource rents windfall. If natural resource rents exceed its long-term median by more than 38.2%, this positive relationship is severely weakened. We suggest that the existence of this threshold means that climate finance needs to be more strategically targeted in resource dependent economies if the aim is to spur environmentally friendly innovation including environmental management practices, especially during periods of high natural resource prices or new discoveries. By offering these insights, our paper contributes to a deeper understanding of the complex relationship between natural resource dependence, climate finance, and innovation.